Question

Tobin Supplies Company expects sales next year to be $360,000. Inventory and accounts receivable will increase $90,000 to accommodate this sales level. The company has a steady profit margin of 15 percent with a 40 percent dividend payout. 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.

Answer 1

To calculate the external financing, consider the increase in inventory and accounts receivable. With a profit margin of 15% and a 40% dividend payout, the company will have to seek $57,600 in external financing.

Step-by-step explanation:

To calculate the external financing that Tobin Supplies Company will have to seek, we need to consider the increase in inventory and accounts receivable. Based on the information provided, the increase in these two assets is $90,000. Since the company has a steady profit margin of 15 percent, the profit generated from the expected sales of $360,000 would be $54,000 (15% of $360,000).

With a dividend payout of 40 percent, the amount of profit retained within the company would be $32,400 ($54,000 - 40% of $54,000).

Therefore, the external financing that Tobin Supplies Company would have to seek would be $57,600 ($90,000 - $32,400).