McKinny Enterprises must raise $580,000 to pay off a bank loan at the end of the year. The firm expects sales of $5,200,000 for the year. Depreciation for the year is $315,000. The company's net profit margin is 5%
Can the company pay off its loan through the retention of earnings?
Answer: Net profit = sales × net profit margin = $5,200,000 × .05 = $260,000
Internal funds generated by the firm = net profit + depreciation = $260,000 + $315,000 = $575,000
McKinny cannot pay off its loan by using only internally generated funds.
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