Firm QTP currently has sales of $9 million with an asset base of $25 million. QT

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. $ 5.06 million

B) Assuming QTP now has accounts payable of $0.5 million, what is the EFR? Round your answer to two decimal places. $4.95 million

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. $4.79 million

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

Explanation / Answer

A. EFR when the net sales increases by 22%

EFR = ($25 million ÷ $9 million)*(22%*$9 million) - $0.00 – 10%*$9 million*(1 + 22%)*(1 – 60%) = $5,060,800 = 5.06 Million

B. EFR with accounts payable:

EFR with accounts payable = $5.06 million – ($0.5 million ÷ $9 million)*(22%*$9 million) = $4,950,000 = 4.95 Million

C:EFR with accounts payable and reduced dividend

EFR with accounts payable and reduced dividend = ($25 million ÷ $9 million)*(22%*$9 million) - ($0.5 million ÷ $9 million)*(22%*$9 million) – 10%*$9 million*(1 + 22%)*(1 – 45%) = 4,786,100 = 4.79 Million

D:Based on the signaling model of dividends, QTP should increase the dividend to “signal” the expansion to the public

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