Question

Chua Chang & Wu Inc. 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%

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	a.	-$14,820
	b.	-$19,000
	c.	-$20,520
	d.	-$23,180
	e.	-$21,280

Answer 1

Answer is -$19,000

Last Year:

Sales = $200,000
Total Assets = $127,500

Spontaneous Current Liabilities = Accounts Payable + Accruals
Spontaneous Current Liabilities = $50,000 + $20,000
Spontaneous Current Liabilities = $70,000

Coming Year:

Sales = $200,000 * (1 + 40%)
Sales = $280,000

Net Income = Sales * Profit Margin
Net Income = $280,000 * 20%
Net Income = $56,000

Addition to Retained Earnings = Net Income * (1 - Payout Ratio)
Addition to Retained Earnings = $56,000 * (1 - 0.25)
Addition to Retained Earnings = $42,000

Increase in Total Assets = $127,500 * 40%
Increase in Total Assets = $51,000

Increase in Spontaneous Current Liabilities = $70,000 * 40%
Increase in Spontaneous Current Liabilities = $28,000

Additional Funds Needed = Increase in Total Assets - Addition to Retained Earnings - Increase in Spontaneous Current Liabilities
Additional Funds Needed = $51,000 - $42,000 - $28,000
Additional Funds Needed = -$19,000