Question

Use this table to answer this question (All are stated in million dollars)

Quantum Inc. Balance Sheet		2020	2019	Quantum Inc. Balance Sheet			2020	2019
Cash and cash equivalents		2,768	2,879	Accounts payable			8,022	7,251
Accounts receivable		6,275	5,335	Accruals			9,290	8,559
Total inventories		7,379	6,384	Notes Payables			9,981	8,472
Prepaid expenses		5,548	4,184	Long-term debt			22,033	21,360
TOTAL CURRENT ASSETS		21,970	18,782	Other borrowings			21,027	21,091
Net Property Plants (Net PPE)		21,293	19,244	Common stock+ paid in Cap			58,134	58,134
Intangible assets		95,091	90,146	Retained earnings			9,867	3,305
TOTAL ASSETS		138,354	128,172	TOTAL LIAB & EQUITY			138,354	128,172
	Quantum Inc. Income Statement			2020	2019
	NET SALES			82,559	78,938
	Cost of products sold			40,768	37,919
	Selling, general and administrative expense			23,135	21,890
	Depreciation expense			2,838	3,108
	OPERATING INCOME			15,818	16,021
	Interest expense			629	974
	EARNINGS BEFORE INCOME TAXES			15,189	15,047
	Income taxes			3,392	3,360
	NET INCOME			11,797	11,687
	Total Dividends Payments			5,235	5,186

Suppose the expected growth of net sales for 2021 is 8%, calculate the Quantum Inc. Additional Fund Needed (AFN) for 2021 based on the 2020 status quo. Also, please carefully explain the meaning of the projected 2021 AFN that you calculated.

Answer 1

Additional funds needed (AFN) =

increase in assets - the increase in liabilities - increase in retained earnings.

Formula

=

Where,

Ao = current level of assets i.e 2020 assets which are directly related to sales
Lo = current level of liabilities i.e 2020 spontaneous liabilities that are affected by sales
ΔS/So = percentage increase in sales i.e 8%
S1 = new level of salesi.e 2021 sales
PM = profit margin of 2020
b = retention rate = 1 – payout rate of 2020

A_{​​​​​​0}​​​​​=Total current assets +NET PPE

=$21,970+$21,293

=$43,263

∆S/S_{​​​​​​0}​​​​​ =8%

L_{​​​​​​0} = Total current liabilities

=$8,022+$9290+$9981

=$27,293

S1=projected Sales of 2021

=Sales of 2020* (1+growth rate)

=$82,559*(1+0.08)

=$89,164

Profit Margin

=

=$11,797/$82,559*100

=14.29%

B=rentention ratio

=1- dividend payout ratio

=1- or

=1- 

=1- (5235/11797)

=1- (0.4438)

=0.5562

Ie.55.62%

If we put all above values in formula of. AFN we get,

=$43,263*8% -$27,293*8% -($89,164*14.29%*55.62%)

=$3,461.04 - $2,183.44 - $7,086.84

=-$5,809.24

Additional fund needed for 2021 based on 2020 status quo is negative (-$5,809.24)

Part 2:

AFN is nothing but to determine how much new funding will be required, if firm decided to achieve the higher sales level.

So ,determining the amount of external funding needed to purchase new assets which will help to generate additional sales is a key part of calculating AFN.

If this value is negative, it means that project which is being undertaken will generate extra income and hence there is surplus of capital and hence no need of external funding but Quantum Inc. should re-invest this surplus ($5,809.24) elsewhere in business and earn income on it.