Question

Antivirus Inc. expects its sales next year to be $3,300,000. Inventory and accounts receivable will increase by $560,000 to accommodate this sales level. The company has a steady profit margin of 8 percent with a 15 percent dividend payout.

How much external financing will the firm have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing.

Answer 1

Next Year:

Sales = $3,300,000
Profit Margin = 8%
Dividend Payout Ratio = 15%

Net Income = Sales * Profit Margin
Net Income = $3,300,000 * 8%
Net Income = $264,000

Additions to Retained Earnings = Net Income * (1 - Dividend Payout Ratio)
Additions to Retained Earnings = $264,000 * (1 - 0.15)
Additions to Retained Earnings = $224,400

External Financing = Increase in Current Assets - Additions to Retained Earnings
External Financing = $560,000 - $224,400
External Financing = $335,600

So, firm have to seek $335,600 from external financing