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 40% of sales. BHS has an 8% profit margin and a 40% dividend payout ratio. What is the level of required new funds?
A)$3,600
B)$5,200
C)$4,000
D)BHS is in balance and no new funds are needed.

Question

Quizplus · Accepted Answer

Explanation:Spontaneous assets = 60% of sales = 0.6 * $550,000 = $330,000Spontaneous liabilities = 40% of sales = 0.4 * $550,000 = $220,000Net spontaneous funds = Spontaneous assets - Spontaneous liabilities = $330,000 - $220,000 = $110,000Net income = 8% of sales = 0.08 * $550,000 = $44,000Dividends = 40% of net income = 0.4 * $44,000 = $17,600Required new funds = Net spontaneous funds + Dividends = $110,000 + $17,600 = $127,600

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