Question

Item2 2 points eBook HintPrintCheck my work Check My Work button is now enabled5Item 2Item 2 2 points Galehouse Gas Stations Inc. expects sales to increase from $1,570,000 to $1,770,000 next year. Galehouse believes that net assets (Assets − Liabilities) will represent 60 percent of sales. His firm has an 10 percent return on sales and pays 40 percent of profits out as dividends. a. What effect will this growth have on funds? b. If the dividend payout is only 20 percent, what effect will this growth have on funds?

Answer 1

a). Increase in Sales = Sales next year - Current Sales = $1,770,000 - $1,570,000 = $200,000

Asset Buildup = 0.60 * Increase in Sales = 0.60 * $200,000 = $120,000

Profits = 0.10 * sales in next year = 0.10 * $1,770,000 = $177,000

Dividends = 0.40 * Profits = 0.40 * $177,000 = $70,800

Change in Cash = Profits - Asset Buildup - Dividends = $177,000 - $120,000 - $70,800 = -$13,800

The cash balance will reduce by $13,800.

b). Dividends = 0.20 * Profits = 0.20 * $177,000 = $35,400

Change in Cash = Profits - Asset Buildup - Dividends = $177,000 - $120,000 - $35,400 = $21,600

The cash balance will increase by $21,600.