Antivirus Inc. expects its sales next year to be $2,100,000. Inventory and accou

Question

Antivirus Inc. expects its sales next year to be $2,100,000. Inventory and accounts receivable will increase by $440,000 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.

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

Expected Sales in next year = $ 2,100,000 ;

Increase in Inventory and accounts receivables = $ 440,000

Increase in Liabilities = 0

Profit Margin = 8%

Dividend Pay out = 15% that is Retention rate = 85%

The formula: Additional funds needed = Increase in assets - Increase in liabilities - Increase in retained earnings

Increase in assets - Increase in liabilities - Increase in sales * Profit Margin *retention rate

$ 440,000 - $ 0 - $ 2,100,000 * 8% * 85%

$ 440,000 - $ 0 - $ 142,800

$ 297,200

Therefore, External funds needed = $ 297,200

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