Q.How much additional external capital will be required for next year if sales increase 15 percent? (Assume that the company is already operating at full capacity.) Increase in sales = 15% of $100 million = $15 Million Corresponding increase in Assets = (5% + 15% + 25% +40%) of $15 mn = 85% of $15 mn = $12.75 mn Corresponding increase in Liabilities = (15% + 10%) of 15 mn = 25% of 15 mn = $3.75 mn Profit = 6% of 115 mn = $6.9 mn ( as profit margin is 6%) Out of this $6.9 mn, dividend payment will be 50% i.e $3.45 mn Rest $3.45 is reatain earning, so this much amount company does not require as additional capital. So, required additional capital = increase in Assets - increase in Liabilities - Retained earning = $12.75 mn - $3.75 mn - $3.45 mn = $5.55 million Q.What will happen to external fund requirements if Landis Corporation reduces the payout ratio, grows at a slower rate, or suffers a decline in its profit margin? Discuss each of these separately. 1)Reduces the payout ratio- If payout ratio is reduced, company will pay less dividend to the shareholders. So, more fund will remain with the company.Hence, external fund requirement will reduce. 2)grows at a slower rate- If company grows at a slower rate, less asset will be created hence fund requirement will be less. So, external fund requirement will reduce. 3)decline in its profit margin - If profit margin declines, company will have lesser profit and hence lesser retained earning. So, requirement of external fund will increase.