Axie Supply Co., expects sales next year to be $390,000. Inventory and accounts

Question

Axie Supply Co., expects sales next year to be $390,000. Inventory and accounts receivable will increase by $60,000 to accommodate this sales level. The company has a steady profit margin of 20 percent with a 45 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.

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.

Explanation / Answer

As profit margin = Profit /sales

=> profit/390000 = 0.2

=> next year profit will be =$78,000

but dividend pay out = 0.45*78000 =$35,100

So remaining funds = 78000-35100=$42,900

but As $60,000 needed to be received , so external funding required = 60000-42900 =$17,100

ans:$17,100

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