BHS Inc. determines that sales will rise from $400,000 to $550,000 next year. Spontaneous assets are 60% of sales, and spontaneous liabilities are 30% of sales. BHS has an 8% profit margin and a 40% dividend payout ratio. What is the level of required new funds?
A) $18,600
B) $138,600
C) $3,600
D) No new funds are needed

Question

Quizplus · Accepted Answer

The increase in sales is $150,000 ($550,000 - $400,000). The increase in spontaneous assets is 60% of this, or $90,000 ($150,000 * 60%). The increase in spontaneous liabilities is 30% of the increase in sales, or $45,000 ($150,000 * 30%). The net increase in financing needed for assets after accounting for spontaneous liabilities is $45,000 ($90,000 - $45,000). The profit from the increase in sales is 8% of $150,000, which is $12,000. With a 40% dividend payout ratio, the retained earnings are 60% of $12,000, or $7,200. The required new funds are the net increase in financing needed for assets minus the retained earnings, which is $45,000 - $7,200 = $37,800. However, none of the options match this calculation, indicating a mistake in my calculation based on the provided options. Let's correct the approach:The correct calculation should consider the net increase in assets and liabilities, the profit generated from the sales increase, and how much of that profit is retained after dividends are paid.1. Increase in sales: $550,000 - $400,000 = $150,0002. Increase in spontaneous assets: $150,000 * 60% = $90,0003. Increase in spontaneous liabilities: $150,000 * 30% = $45,0004. Net increase in assets that need financing: $90,000 - $45,000 = $45,0005. Profit from the increase in sales: $150,000 * 8% = $12,0006. Retained earnings (not paid out as dividends): $12,000 * (1 - 40%) = $12,000 * 60% = $7,2007. Required new funds (RNF) = Net increase in assets - Retained earnings = $45,000 - $7,200 = $37,800Given the mistake in the initial explanation and the mismatch with the provided options, let's reassess the situation based on the options given:The correct approach to find the Required New Funds (RNF) involves calculating the increase in assets and liabilities due to the sales increase, determining the additional profits, and accounting for the portion of profits retained after dividends are paid out.1. Increase in sales = $550,000 - $400,000 = $150,0002. Increase in spontaneous assets = 60% of $150,000 = $90,0003. Increase in spontaneous liabilities = 30% of $150,000 = $45,0004. Net increase in assets after accounting for liabilities = $90,000 - $45,000 = $45,0005. Additional profits (8% of the increase in sales) = 8% of $150,000 = $12,0006. Retained earnings (60% of additional profits, since 40% is paid out as dividends) = 60% of $12,000 = $7,2007. Required New Funds (RNF) = Net increase in assets - Retained earnings = $45,000 - $7,200 = $37,800Given the recalculated explanation and the absence of $37,800 in the options, it appears there was an error in my recalculation or a misunderstanding of the question's requirements. The correct answer should be derived from understanding the relationship between the increase in sales, the corresponding increase in assets and liabilities, the profit generated, and how much of that profit is retained after dividends. Without a matching option, my explanation based on the provided options and calculations has led to confusion. The correct process involves calculating the net increase in financing needed after accounting for spontaneous liabilities and retained earnings, but the final answer should be carefully checked against the options provided.

BHS Inc Determines That Sales Will Rise from $400,000 to $550,000