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CA Final · Advanced Financial Management · Financial Policy and Corporate Strategy

Aarav Pharma has sales of Rs 100 crore, with net profit margin 5% and a dividend payout of 40%. Sales are expected to rise 20% next year. Existing assets of Rs 60 crore grow proportionately with sales, and spontaneous liabilities of Rs 15 crore also grow proportionately. What external funds are required, on the percentage of sales method?

External funds required are Rs 5.40 crore. Assets rise by Rs 12 crore and spontaneous liabilities by Rs 3 crore, leaving Rs 9 crore to finance. Retained profit on sales of Rs 120 crore is Rs 3.6 crore, so the balance Rs 5.4 crore must be raised externally.

  1. ARs 5.40 croreCorrect
  2. BRs 9.00 crore
  3. CRs 3.60 crore
  4. DRs 8.40 crore

Explanation

Asset increase = 60 x 20% = 12. Liability increase = 15 x 20% = 3. New sales = 120; profit = 6; retained = 6 x 60% = 3.6. External funds = 12 - 3 - 3.6 = 5.4. Rs 3.60 crore is just retained earnings; Rs 8.40 crore ignores retained earnings by using 12-3-0.6 error.

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