Yeats Corp is trying to determine ist short term cash needs. Given the following

Question

Yeats Corp is trying to determine ist short term cash needs. Given the following information, how much money will Yeats need to borrow next year?

Sales next year are expected to be $500 million

operating margin is expected to be 8%

Interest expense is expected to be $6 million

Tax rate is 40%

Dividend payout ratio is 30%

Increase in working capital is 5% of sales

Increase in fixed assets is 10% of sales

No new equity will be issued

Need the following anwers and please show work to be credited for the point:

Sales -

Operating Income -

Interest Expense -

Income before taxes -

Net Income -

Dividends -

Increase in Retained Earnings -

Increase in Working Capital -

Increase in Assets -

Additional Capital needed -

Explanation / Answer

Sales= $500 million

Operating margin = 8% of sales = $40million

Less :interest   = $6million

Operating profit before tax = $34 million

Less:Tax= 40% of 34 million= $13.6 million

Profit after tax (profit available to equity share holders) = 20.4 million

Dividends (30% of profits) = 6.12

Retained earnings= 20.4-6.12=14.28

Increase in working capital = 5% of sales= 25million

Increase in fixed assets = 10% of sales =50 million

Total additional capital required = 75 million

Out of total 75 million14.28 million the company will get from retained earnings. So remaining amount to be borrowed next year=75-14.28= $60.72 million

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