Tobin Supplies Company expects sales next year to be $500,000. Inventory and accounts receivable will increase $90,000 to accommodate this sales level. The company has a steady profit margin of 12 percent with a 40 percent dividend payout. How much external financing will Tobin Supplies Company have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing.

How much external financing will Tobin Supplies Company have to seek is $54,000.

First step is to calculate net income

Net Income = $500,000 x 12%

Net income=$60,000

Second step is to calculate Dividend Pay-out

Dividend Pay-out =$60,000 x 40%

Dividend Pay-out =$24,000

Third step is to calculate Additions to Retained Earnings

Additions to Retained Earnings =$60,000 - $24,000

Additions to Retained Earnings =$36,000

Fourth step is to calculate External Funds Needed

External Funds Needed = Increase in Assets – Additions to retained earnings

External Funds Needed = $90,000 - $36,000

External Funds Needed = $54,000

Inconclusion how much external financing will Tobin Supplies Company have to seek is $54,000.

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$54,000

Explanation:

Given:

Sales = $500,000

Increase in Inventory = $90,000

Profit margin = 12% = 0.12

Dividend payout = 40% = 0.40

Computation:

Net income = Sales × Profit margin = $500,000 × 0.12 = $60,000

Dividend = Net income × Dividend payout = $60,000 × 0.40 = $24,000

Increase in retained earnings = Net income - Dividend = $60,000 - $24,000 = $36,000  

External Fund = Increase in Inventory - Increase in retained earnings

= $90,000 - $36,000

= $54,000

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