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Sohar Video Products' sales are expected to increase from OMR (10) million in 2020 to OMR (12) million in 2021
Sohar Video Products' sales are expected to increase from OMR (10) million in 2020 to OMR (12) million in 2021. Asset turnover generated in the 2020 of (2.5) times. Sohar Company is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2019, current liabilities were OMR (2) million, the net profit was OMR (30) thousand, and the dividend payout ratio was 20%. Suppose the net profit margin and dividend payout ratio will hold the same percentage in 2021. Is Muscat company needs fund from external or internal to finance the new sales in 2020? And why. (Note: - Kindly mention the equations that are related)
Expert Solution
Equation for EFN:
External fund needed, EFN = A0 x g - L0 x g - S1 x M x (1 - DPR)
where A0 = Asset last year = Sales / Asset turnover = 10/2.5 = 4
g = growth rate in sales = S1/S0 - 1 = 12/10 - 1 = 20%
L0 = Spontaneous liabilities last year = 2
S1 = projected sales = 12
M = profit margin = Net profit /sales = 30,000 / 10,000,000 = 0.30%
DPR = 20%
Hence, EFN = 4 x 20% - 2 x 20% - 12 x 0.30% x (1 - 20%) = OMR 0.3712 million
Hence, the company needs external funds to the tune of OMR 0.3712 million to finance the new sales. This is because internally generated and retained profits are not good enough to support the incremental assets needed to support the growth in sales.
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