A services firm does all its business in cash only. The firm projects a cash balance of $2 000 in its account after all taxes and costs are paid. The owners plan to invest $5 000 and pay a dividend of $1 000. How much net new financing is needed?

Question

Quizplus · Accepted Answer

Since the firm plans to invest $5 000 and pay a dividend of $1 000, this will result in an outflow of $6 000. However, the firm only has a projected cash balance of $2 000. Therefore, it will need net new financing of $4 000 ($6 000 - $2 000 = $4 000).

A Services Firm Does All Its Business in Cash Only