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

Vistar Pharma Ltd forecasts next year's sales of ₹600 crore, up from ₹500 crore. Assets that vary with sales are 70% of sales and spontaneous liabilities are 20% of sales. Net margin is 5% on projected sales and the firm retains 60% of profit. No other financing is planned. What external funds requirement (EFR) arises using the percentage-of-sales method?

External funds requirement is ₹32 crore. Assets rise by ₹70 crore on a ₹100 crore sales increase, spontaneous liabilities supply ₹20 crore, and retained earnings of ₹18 crore (5% of ₹600 crore times 60%) also fund growth, leaving ₹32 crore to be raised externally.

  1. A₹32 croreCorrect
  2. B₹50 crore
  3. C₹18 crore
  4. D₹68 crore

Explanation

Increase in sales = ₹100 crore. Increase in assets = 70% × 100 = ₹70 crore. Spontaneous liabilities increase = 20% × 100 = ₹20 crore. Retained earnings = 5% × 600 × 60% = ₹18 crore. EFR = 70 − 20 − 18 = ₹32 crore. The ₹50 crore option omits the retained earnings, and ₹18 crore is just retained earnings.

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