Antivirus Inc. expects its sales next year to be $2,900,000. Inventory and accou

Question

Antivirus Inc. expects its sales next year to be $2,900,000. Inventory and accounts receivable will increase by $520,000 to accommodate this sales level. The company has a steady profit margin of 10 percent with a 25 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

External funds needed:

= Increase in current assets-Retained earnings

= $520,000-$2,900,000×10%×(1-25%)

= $302,500

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