Question

Tobin Supplies Company expects sales next year to be $500,000. Inventory and accounts receivable will increase $90,000 to accommodate this sales level. The company has a steady profit margin of 12 percent with a 40 percent dividend payout. How much external financing will Tobin Supplies Company have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing.

Answer 1

Answer:

$54,000

Explanation:

Given:

Sales = $500,000

Increase in Inventory = $90,000

Profit margin = 12% = 0.12

Dividend payout = 40% = 0.40

Computation:

Net income = Sales × Profit margin = $500,000 × 0.12 = $60,000

Dividend = Net income × Dividend payout = $60,000 × 0.40 = $24,000

Increase in retained earnings = Net income - Dividend = $60,000 - $24,000 = $36,000  

External Fund = Increase in Inventory - Increase in retained earnings

= $90,000 - $36,000

= $54,000