Question

Galehouse Gas Stations Inc. expects sales to increase from $1,610,000 to $1,810,000 next year. Mr. Galehouse believes that net assets (Assets − Liabilities) will represent 40 percent of sales. His firm has an 7 percent return on sales and pays 60 percent of profits out as dividends. (Input all amounts as positive values.)

a. What effect will this growth have on funds?

The cash balance will increase or decrease by $ .

b. If the dividend payout is only 35 percent, what effect will this growth have on funds?

The cash balance will increase or decrease by $ .

Answer 1

A. Cash decreased = $29,320

B. Cash increased = $2,355

Step-by-step explanation:

A. Change in net assets:

Change in sales = $1,810,000 - $1,610,000 =$200,000

Increase in net assets = 40% of Change in sales

=40% of $200,000

= $80,000

Net income = sale * Return on sale

=$1,810,000 * 7%

=$12,6700

Net cash inflows = net income - dividend paid

=$12,6700 - ($12,6700*60%)

=$12,6700 - $76,020

=$506,80

Cash outflow = $80,000

less: cash inflow = $50,680

Requires more fund.

Net cash decreased = $29,320

B. Net income = sale * Return on sale

=$1,810,000 * 7%

=$12,6700

Net cash inflows = net income - dividend paid

=$12,6700 - ($12,6700*35%)

=$12,6700 - $44,345

=$82,355

Cash outflow = $80,000

less: cash inflow = $82,355

Net cash increased = $2,355

Gets sufficient fund.