Pickup Industries has a profit margin of 15% and a dividend payout of 40%. Last year's sales were $600 million and total assets were $400 million. None of the liabilities vary directly with sales, but assets and costs do. If the sales growth rate for Pickup is 20%, how much external financing is needed?

Question

Quizplus · Accepted Answer

To find the external financing needed, calculate the increase in assets required due to sales growth, subtract the increase in retained earnings. Sales increase by 20% of $600 million, which is $120 million. Assets increase by 20% of $400 million, which is $80 million. Profit is 15% of $720 million (new sales), which is $108 million. Retained earnings are 60% of $108 million, which is $64.8 million. External financing needed is $80 million (increase in assets) - $64.8 million (retained earnings) = $15.2 million.

Pickup Industries Has a Profit Margin of 15% and a Dividend