Shamrock Diamonds expects sales next year to be Php 3,000,000.00. Inventory and Accounts
Receivable will increase Php 420,000.00 to accommodate this sales level. The company had a steady
profit margin of 10 percent with a 25 percent dividend payout. How much external financing will the
firm have to seek?
To determine the amount of external financing that Shamrock Diamonds needs to seek, we need to consider the changes in the company's inventory and accounts receivable.
Step 1: Calculate the sales increase
Given that sales next year are expected to be Php 3,000,000.00 and the company will increase inventory and accounts receivable by Php 420,000.00, we need to subtract this increase from the sales figure.
New Sales = Sales + Increase in Inventory + Increase in Accounts Receivable
New Sales = Php 3,000,000.00 + Php 420,000.00
New Sales = Php 3,420,000.00
Step 2: Calculate the profit
Since the company has a steady profit margin of 10 percent, we can calculate the profit by multiplying the new sales figure by the profit margin.
Profit = New Sales * Profit Margin
Profit = Php 3,420,000.00 * 0.10
Profit = Php 342,000.00
Step 3: Calculate the dividend payout
The dividend payout is given as 25 percent. To find the dividend amount, we multiply the profit by the dividend payout ratio.
Dividend = Profit * Dividend Payout Ratio
Dividend = Php 342,000.00 * 0.25
Dividend = Php 85,500.00
Step 4: Calculate the amount of external financing needed
The amount of external financing required is equal to the increase in inventory and accounts receivable minus the dividend payout.
External Financing = Increase in Inventory + Increase in Accounts Receivable - Dividend
External Financing = Php 420,000.00 - Php 85,500.00
External Financing = Php 334,500.00
Therefore, Shamrock Diamonds will need to seek Php 334,500.00 in external financing.