Question

Kitty Company is planning its operations for next year, and the CEO wants you to forecast the firm's additional funds needed (AFN). Data for use in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year?

Last year's sales = S0	$200,000		Last year's accounts payable	$50,000
Sales growth rate = g	40%		Last year's notes payable	$15,000
Last year's total assets = A0*	$127,500		Last year's accruals	$20,000
Last year's profit margin = PM	20.0%		Target payout ratio	25.0%

​

Answer 1

AFN = (A0/S0)*change in sales-(L0/S0)*change in sales-M*S1*(1-Payout ratio)

Given

A0 = Last year total assets = 127,500

S0 = sales of last year = 200,000

L0 = Last year liabilities = 50,000+15,000+20,000 = 85,000

M = profit margin = 20%

S1 = Sales of current year = Sales of last year + Sales of last year*growth rate

= 200,000+200,000*40%

= 200,000+80,000

= 280,000

Payout ratio = 25%

Change in sales = S1-S0

= 280,000-200,000

= 80,000

AFN = (127,500/200,000)*80,000-(85,000/200,000)*80,000-20%*280,000*(1-0.25)

= 0.6375*80,000-0.425*80,000-56,000*0.75

= 51,000-34,000-42,000

= 51,000-76,000

= -25,000

Additional funds required (AFN) = 25,000