Andy's total assets are $2,500,000, net profit margin is 5% of sales, dividend payout ratio of 60%, and the ratio of its spontaneous liabilities to sale is 20%. If sales rise from their present level of $5 million by%1,000,000 next year, what will be the firms needs for discretionary financing?
To find the firm's needs for discretionary financing, we need to calculate the change in assets, liabilities, and equity due to the increase in sales.
1. Calculate the increase in sales: $5 million + $1 million = $6 million
2. Calculate the net profit margin: Net profit margin = 5% of sales = 0.05 * $5 million = $250,000
3. Calculate the increase in net income: $250,000 * $1 million = $250,000,000
4. Calculate the increase in retained earnings: Increase in retained earnings = Net income - Dividends
Increase in retained earnings = $250,000,000 - (60% of $250,000,000)
Increase in retained earnings = $250,000,000 - $150,000,000 = $100,000,000
5. Calculate the increase in equity: Increase in equity = Increase in retained earnings / (1 - Dividend payout ratio)
Increase in equity = $100,000,000 / (1 - 0.60) = $100,000,000 / 0.40 = $250,000,000
6. Calculate the increase in assets: Increase in assets = Increase in equity + Increase in liabilities
Increase in assets = $250,000,000 + (20% of $6 million)
Increase in assets = $250,000,000 + $1.2 million = $251,200,000
7. Calculate the needs for discretionary financing: Needs for discretionary financing = Increase in assets - Increase in liabilities
Since the question does not provide information about the increase in liabilities, we cannot calculate the firm's needs for discretionary financing.
In this case, we need more information about the increase in liabilities to calculate the firm's needs for discretionary financing.