Firm QTP currently has sales of $9 million with an asset base of $25 million. QTP has no accounts...

Question:

Firm QTP currently has sales of $9 million with an asset base of $25 million. QTP has no accounts payable, a net profit margin of 10%, and a dividend payout ratio of 60%.

A) If QTP decides to increase sales by 22 %, how much external funds required (EFR) are necessary? Round your answer to two decimal places.

B) Assuming QTP now has accounts payable of $0.5 million, what is the EFR? Round your answer to two decimal places.

C) In addition to having these accounts payable, QTP decides to cut its dividend, making the dividend payout ratio equal to 45%. What then is the associated EFR? Round your answer to two decimal places.

D) Based on the signaling model of dividends, should QTP increase or decrease the dividend to indicate its new plan to sales expansion?

External Funds Required

By calculating the projected increase in assets (as a ratio of sales) and subtracting the increase in liabilities and retained earnings (again, as a ratio of sales), EFR can be calculated and serves as a tool to identify the amount of cash that is needed from external sources to fund the forthcoming plans of the business.

Answer and Explanation:

Let assets = A, liabilies = L and Sales = S. The formula we will use to find EFR is :

{eq}EFR = (A_0\cdot\frac{S_1-S_0}{S_0}) -...

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How to Identify the External Financing Needed (EFN)

from Finance 101: Principles of Finance

Chapter 4 / Lesson 4
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