Question

Frisch Fish Corp expects net income next year to be $750,000. Inventory and accounts receivable will have to be increased by $650,000 to accommodate this sales level. Frisch will pay dividends of $300,000. How much external financing will Frisch Fish need assuming no organically generated increase in liabilities?

A. No external financing is required.

B. $100,000

C. $200,000

D. $300,000

Answer 1

Frisch Fish Corp will need $200,000 in external financing to cover the necessary increase in inventory and accounts receivable and to pay dividends, given their expected net income.

Step-by-step explanation:

The question is asking us to determine how much external financing Frisch Fish Corp will need based on their expected net income, the required increase in inventory and accounts receivable, and the dividends they plan to pay. Initially, we identify that the company expects a net income of $750,000. However, they need to increase their inventory and accounts receivable by $650,000 to support sales and will also pay out dividends of $300,000.

1. 
   
3. Identify available funds: Net Income = $750,000.
4. 
   
6. Calculate required investments: Inventory and Accounts Receivable increase = $650,000.
7. 
   
9. Identify cash outflows: Dividends = $300,000.
10. 
    
12. Determine total required cash: Total required = $650,000 (investments) + $300,000 (dividends) = $950,000.
13. 
    
15. Calculate external financing need: External financing required = Total required - Net Income = $950,000 - $750,000 = $200,000.

Therefore, the amount of external financing Frisch Fish Corp will need is