Question

Problem 4-3 (Algo) Growth and financing [LO4-4] Galehouse Gas Stations Incorporated expects sales to increase from $1,590,000 to $1,790,000 next year. Galehouse believes that net assets (Assets − Liabilities) will represent 50 percent of sales. Her firm has an 7 percent return on sales and pays 45 percent of profits out as dividends. a. what effect will this growth have on funds? The cash balance will ____ , ____ b. If the dividend payout is only 20 percent, what effect will this growth have on funds? The cash balance will ____ , ____

Answer 1

The growth in sales will have a positive effect on funds, increasing the cash balance. With a lower dividend payout, the effect on funds will be more significant, resulting in a higher cash balance.

Step-by-step explanation:

a. The growth in sales from $1,590,000 to $1,790,000 will have a positive effect on funds. The cash balance will increase as a result of the increase in sales.

b. If the dividend payout is only 20 percent, the growth will have a more significant effect on funds. The cash balance will increase even more compared to the previous scenario with a 45 percent dividend payout.

Answer 2

The growth in sales will increase the cash balance by $100,000, and if the dividend payout is only 20 percent, the cash balance will increase by $80,000.

Step-by-step explanation:

a. The cash balance will increase by the difference between the sales of the current year and the sales of next year, multiplied by the proportion of net assets to sales. In this case, the cash balance will increase by ($1,790,000 - $1,590,000) x 50% = $100,000.

b. If the dividend payout is only 20 percent, the cash balance will increase by ($1,790,000 - $1,590,000) x 50% - ($1,790,000 - $1,590,000) x 20% = $80,000.