Green Moose Industries reported sales of $743,000 at the end of last year, but t
ID: 2811326 • Letter: G
Question
Green Moose Industries reported sales of $743,000 at the end of last year, but this year, sales are expected to grow by 10%. Green Moose expects to maintain its current profit margin of 21% and dividend payout ratio of 20%. The following information was taken from Green Moose's balance sheet: Total assets:$475,000 Accounts payable: $60,000 Notes payable:$30,000 Accrued liabilities: $75,000 Based on the AFN equation, the firm's AFN for the current year is A positively signed AFN value represents A point at which the funds generated within the firm equal the demands for funds to finance the firm's future expected sales requirements forecasted future growth additional dividends O A shortage of internally generated funds that must be raised outside the company to finance the company's O A surplus of internally generated funds that can be invested in physical or financial assets or paid out as Because of its excess funds, Green Moose Industries is thinking about raising its dividend payout ratio to satisfy shareholders. Green Moose could pay out external capital. (Hint: What can Green Moose increase its dividend payout ratio to before the AFN becomes positive?) of its earnings to shareholders without needing to raise anyExplanation / Answer
Answer 1 AFN i.e. Additional Fund Needed = Increase in assets - Increase in short term liabilities - Increase in retained earnings Increase in assets = Last year sales * Sales growth rate = $743000 * 10% = $74,300 Increase in short term liabilities = [Last year Accounts payable + Last Year Accrued Liabilities] * Growth rate Increase in short term liabilities = [$60000 + $75000] * 10% = $13500 Increase in retained earnings = Last year sales x (1+Sales growth rate) x Profit Margin % x (1-dividend payout ratio) Increase in retained earnings = $743000 x (1+0.10) x 21% x (1-0.20) = $1,37,306.40 AFN i.e. Additional Fund Needed = $74300 - $13500 - $137306.40 = -$76,506.40 Based on the AFN equation , the firm's AFN for current year is -$76,506 Answer 2 A positively signed AFN value represents , A shortage of internally generated funds that must be raised outside the company to finance the company's forecasted future growth. Answer 3 Revised dividend payout ratio = {[Forecasted profit margin * current dividend payout ratio] - AFN]} / Forecasted profit margin Revised dividend payout ratio = {[$171633 * 20%] + $76506]} / $171633 Revised dividend payout ratio = $110833 / $171633 = 64.58% Because of its excess funds , Green House Industries is thinking about raising its dividend payout ratio to satisfy shareholders. Green House could pay out 64.58% of its earnings to shareholders without needing to raise any external capital.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.