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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 pay-out. 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.

Short Answer

Expert verified

The external financing that the company has to seek is $54,000.

Step by step solution

01

Information given in the question

The following information is provided:

Expected sales = $500,000

Expected increase in inventory and accounts receivables = $90,000

Profit margin = 12%

Dividend pay-out = 40%

02

Net income calculation

Netincome=Expectedsales×Profitmargins=$500,000×12%=$60,000

03

Dividend payout calculation

Dividendpayout=Netincome×Dividendpayoutpercentage=$60,000×40%=$24,000

04

Addition made to retained earnings

Additiontoretainedearnings=Netincome-Dividendpayout=$60,000-$24,000=$36,000

05

External fund needed

The external fund needed is $54,000.

Externalfundsneeded=Increaseinassets-Additiontoretainedearnings=$90,000-$36,000=$54,000

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Most popular questions from this chapter

Fast Turnstiles Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide \(180,000 in additional credit sales, 12 percent are likely to be uncollectible. The company will also incur \)16,200 in additional collection expense. Production and marketing costs represent 72 percent of sales. The firm is in a 34 percent tax bracket and has a receivables turnover of four times. No other asset build-up will be required to service the new customers. The firm has a 10 percent desired return.

a. Calculate the incremental income after taxes and the return on incremental investment. Should Fast Turnstiles Co. extend credit to these customers?

Eastern Auto Parts Inc. has 15 percent of its sales paid for in cash and 85 percent on credit. All credit accounts are collected in the following month. Assume the following sales:

January

\(65,000

February

\)55,000

March

\(100,000

April

\)45,000

Sales in December of the prior year were $75,000. Prepare a cash receipts schedule for January through April.

Esquire Products Inc. expects the following monthly sales:

January

\(28,000

February

\)19,000

March

\(12,000

April

\)14,000

May

\(8,000

June

\)6,000

July

\(22,000

August

\)26,000

September

\(29,000

October

\)34,000

November

\(42,000

December

\)24,000

Total annual sales

\(264,000

Cash sales are 40 percent in a given month, with the remainder going into accounts receivable. All receivables are collected in the month following the sale. Esquire sells all of its goods for \)2 each and produces them for \(1 each. Esquire uses level production, and average monthly production is equal to annual production divided by 12.

d. Construct a cash budget for January through December using the cash receipts schedule from part b and the cash payments schedule from part c. The beginning cash balance is \)3,000, which is also the minimum desired.

What are three quantitative measures that can be applied to the collection policy of the firm?

Carmen’s Beauty Salon has estimated monthly financing requirements for the next six months as follows:

January

\(8,500

February

\)2,500

March

\(3,500

April

\)8,500

May

\(9,500

June

\)4,500

Short-term financing will be utilized for the next six months.

January

9%

February

10%

March

13%

April

16%

May

12%

June

12%

Here are the projected annual interest rates:

a. Compute total dollar interest payments for the six months. To convert an annual rate to a monthly rate, divide by 12. Then multiply this value times the monthly balance. To get your answer, add up the monthly interest payments.

b. If long-term financing at 12 percent had been utilized throughout the six months, would the total-dollar interest payments be larger or smaller? Compute the interest owed over the six months and compare your answer to that in part a.

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