US CMA Part 1 · Chapter 2 · Question 26 of 30
Sales are forecast to rise from $5,000,000 to $6,000,000. Assets that vary with sales are 60% of sales and spontaneous liabilities are 15% of sales. The net profit margin is expected to be 8%, and 40% of net income will be paid as dividends. Using the percentage-of-sales method, how much external financing is needed?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) $162,000
Explanation
Required increase in assets = 60% x $1,000,000 = $600,000. Spontaneous financing = 15% x $1,000,000 = $150,000. Retained earnings = 8% x $6,000,000 x (1 - 40%) = $288,000. External funds needed = $600,000 - $150,000 - $288,000 = $162,000.
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