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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

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.

Bombs Away Video Games Corporation has forecasted the following monthly sales:

January

\(100,000

February

\)93,000

March

\(25,000

April

\)25,000

May

\(20,000

June

\)35,000

July

\(45,000

August

\)45,000

September

\(55,000

October

\)85,000

November

\(105,000

December

\)123,000

Total annual sales

\(756,000

Bombs Away Video Games sells the popular Strafe and Capture video game. It sells for \)5 per unit and costs \(2 per unit to produce. A level production policy is followed. Each month’s production is equal to annual sales (in units) divided by 12.

Of each month’s sales, 30 percent are for cash and 70 percent are on account. All accounts receivable are collected in the month after the sale is made.

c. Determine a cash payments schedule for January through December. The production costs of \)2 per unit are paid for in the month in which they occur. Other cash payments, besides those for production costs, are $45,000 per month.

Nowlin Pipe & Steel has projected sales of 72,000 pipes this year, an ordering cost of \(6 per order, and carrying costs of \)2.40 per pipe.

c. What will the average inventory be?

What are the advantages of commercial paper in comparison with bank borrowing at the prime rate? What is a disadvantage?

A firm that uses short-term financing methods for a portion of permanent current assets is assuming more risk but expects higher returns than a firm with a normal financing plan. Explain.

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