Question

Antivirus Inc. expects its sales next year to be $2,500,000. Inventory and accounts receivable will increase $480,000 to accommodate this sales level. The company has a steady profit margin of 15 percent with a 35 percent dividend payout. How much external financing will the firm have to seek

Answer 1

Answer:

$236,250

Explanation:

Next year sales = $2,500,000

Profit margin = 15% = Net profit/$2,500,000

Net profit = 15% × $2,500,000 = $375,000

Dividend = $375,000 × 35% = $131,250

Retained earning = $375,000 - $131,250 = $243,750

Asset increase = $480,000

External finance needed = Asset increase - Retained earning = $480,000 - $243,750 = $236,250

Therefore, the firm will have to seek $236,250 external financing.