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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

Route Canal Shipping Company has the following schedule for aging of accounts receivable:

d. Disregarding your answer to part c and considering the aging schedule for accounts receivable, should the company be satisfied?

By using long-term financing to finance part of temporary current assets, a firm may have less risk but lower returns than a firm with a normal financing plan. Explain the significance of this statement.

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

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January

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February

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March

13%

April

16%

May

12%

June

12%

Here are the projected annual interest rates:

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a. Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 75 percent of assets financed by long-term sources, and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest rate is 15 percent on long-term funds and 10 percent on short-term financing.

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