Problems Gary' s Pipe and Steel company expects sales next year to be $800,000 if the economy is strong, $500,000 if the economy is steady, and $350,000 if the economy is weak. Gary believes there is a 20 percent probability the economy will be strong, a 50 percent probability of a steady economy, and a 30 percent probability of a weak economy. What is the expected level of sales for next Solution: Garys Pipe and steel Company apec State of Economy Sales Probability Outcome Stron g 800,000 20 $160.000 Stead 500.000 50 250.000 Weak 350,000 30 105000 Expected level of sales 515,000 Tobin Supplies Company expects sales next year to be $500,000. Inventory and accounts receivable will have to be increased by $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 Solution: Tobin Supplies Company $500.000 Sales 2 Profit margin 60.000 Net income 24.000 Dividends(40%) 36.000 Increase in retained earnings s 90.000 Increase in assets 36.000 Increase in retained earnings S 54.000 External funds needed CopyrightC 2005 by The McGray-Hill Companies, Inc. S-214Copyright © 2005 by The McGraw-Hill Companies, Inc. S-214 Problems 6-1. Gary’s Pipe and Steel company expects sales next year to be $800,000 if the economy is strong, $500,000 if the economy is steady, and $350,000 if the economy is weak. Gary believes there is a 20 percent probability the economy will be strong, a 50 percent probability of a steady economy, and a 30 percent probability of a weak economy. What is the expected level of sales for next year? Solution: Gary’s Pipe and Steel Company State of Economy Sales Probability Expected Outcome Strong $800,000 .20 $160,000 Steady 500,000 .50 250,000 Weak 350,000 .30 105,000 Expected level of sales = $515,000 6-2. Tobin Supplies Company expects sales next year to be $500,000. Inventory and accounts receivable will have to be increased by $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. Solution: Tobin Supplies Company $500,000 Sales .12 Profit margin 60,000 Net income – 24,000 Dividends (40%) $ 36,000 Increase in retained earnings $ 90,000 Increase in assets – 36,000 Increase in retained earnings $ 54,000 External funds needed