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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.
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