Question

Galehouse Gas Stations Inc. expects sales to increase from \(1,550,000 to \)1,750,000 next year. Galehouse believes that net assets (Assets - Liabilities) will represent 50 percent of sales. His firm has an 8 percent return on sales and pays 45 percent of profits out as dividends.

a. What effect will this growth have on funds?

Short answer

The growth in the funds of the company is $8,800.

Step-by-step solution

Expected Profit earned

$\begin{array}{rcl}\mathrm{Profit}\mathrm{earned}& =& \left(\mathrm{Expected}\mathrm{sales}-\mathrm{Current}\mathrm{sales}\right)\times \mathrm{Rate}\mathrm{of}\mathrm{return}\\ & =& \left(\$1,750,000-\$1,550,000\right)\times 8\%\\ & =& \$16,000\end{array}$

Dividend amount

$\begin{array}{rcl}\mathrm{Dividend}\mathrm{amount}& =& \mathrm{Profit}\mathrm{earned}\times \mathrm{Dividend}\mathrm{payout}\mathrm{ratio}\\ & =& \$16,000\times 45\%\\ & =& \$7,200\end{array}$

Growth in the funds

$\begin{array}{rcl}\mathrm{Growth}\mathrm{in}\mathrm{funds}& =& \mathrm{Profit}\mathrm{earned}-\mathrm{Dividend}\mathrm{amount}\\ & =& \$16,000-\$7,200\\ & =& \$8,800\end{array}$