Question

Asempa company limited has sales revenue of 5m. cedis which is expected to grow to 8.0m. cedis next year. Asempa usually makes a net profit of 4% on its sales revenue and pays dividends of 40% to shareholders. The company has total asset of 4.45m. cedis and liabilities that vary with its sales total 1.45m cedis. a) As the director of finance of Asempa, you have been asked to present a statement advising management as to how much funds the company will require in the coming year. b) Shareholders are asking for increment in dividends pay-out of 75%, how does that affect your advice

Answer 1

Asempa Company Limited needs additional funds to accommodate its expected growth in sales revenue and changes in liabilities. The estimated funds required are approximately 1.64 million cedis. If the dividend payout increases by 75%, this would raise the dividend amount, therefore requiring even more funds or reducing the amount available for reinvestment.

Step-by-step explanation:

Answer to Asempa Company Limited's Financial Requirements

Asempa Company Limited, with a current sales revenue of 5 million cedis, expects to grow to 8 million cedis next year. Given that the company has a net profit margin of 4% on sales revenue and traditionally pays out 40% of its profits as dividends to shareholders, the financial requirements can be calculated as follows.

Firstly, the estimated net profit for next year will be 4% of 8 million cedis, which equals 320,000 cedis. If the company continues to pay 40% of this as dividends, the dividends will amount to 128,000 cedis.

When considering changes in liabilities that vary with sales, we assume they will change in proportion to the sales increase. Therefore, the liabilities are anticipated to grow from 1.45 million to (1.45 million/5 million) * 8 million = 2.32 million cedis.

With an increase in assets presumed to be necessary to support the increased sales, the total assets would need to grow in proportion from 4.45 million to (4.45 million/5 million) * 8 million = 7.12 million cedis.

Thus, the needed funds for the coming year, before considering the increased dividend payout, would be 7.12 million - 4.45 million in assets and 2.32 million - 1.45 million in liabilities, equating to an additional need of approximately 1.64 million cedis.

Regarding the dividend payout, if shareholders demand a 75% increase, the new dividend payout ratio would become 70% (40% plus 75% of 40%). Therefore, given the new net profit of 320,000 cedis, the total dividends would be 224,000 cedis (70% of 320,000 cedis), affecting the availability of retained earnings for reinvestment and potentially increasing the need for external financing.