Question

Galehouse Gas Stations Inc. expects sales to increase from $1,670,000 to $1,870,000 next year. Galehouse believes that net assets (Assets − Liabilities) will represent 55 percent of sales. His firm has an 9 percent return on sales and pays 25 percent of profits out as dividends. a. What effect will this growth have on funds? b. If the dividend payout is only 5 percent, what effect will this growth have on funds?

Answer 1

a. The growth in sales will increase funds by $110,000. b. If the dividend payout is 5 percent, the increase in funds will be $104,500.

Step-by-step explanation:

a. To determine the effect of the sales growth on funds, we first calculate the net asset increase: sales growth * net assets as a percentage of sales. In this case, the net asset increase is ($1,870,000 - $1,670,000) * 55% = $110,000. This means that funds will increase by $110,000 due to the sales growth.

b. If the dividend payout is only 5 percent, the effect on funds would be different. In this case, the dividend payment would be lower, resulting in higher retained earnings. The increase in funds would be $110,000 (net asset increase) - (0.05 * $110,000) (dividend payment) = $104,500.