Question

Malabad Cans expects sales next year to be $50,000,000. Inventory and accounts receivable (combined) will increase $8,000,000 to accommodate this sales level. The company has a profit margin of 6 percent. Its dividend payout is 30 percent of profit. How much external financing will the firm have to seek

Answer 1

d. More than $5,000,000 of external financing is needed

Step-by-step explanation:

Missing word "Assume there is no increase in liabilities other than that which will occur with the external financing. A) No external financing will be needed. B) Less than $1,000,000 of external financing is needed. C) Between $1,000,000 and $5,000,000 of external financing is needed. D) More than $5,000,000 of external financing is needed."

Change in assets = $8,000,000

Net profit = $50,000,000 * 6% = $3,000,000

Increase in liabilities = $0

External financing need = Change in Assets - Change in Current liabilities - Retained Earnings

External financing need = ($8,000,000 -- $0) - [$3,000,000*(1-30%)}

External financing need = $8,000,000 - $2,100,000

External financing need = $5,900,000