Question

Garret is initiating planning for the company's operations next year, and he wants you to forecast the firm's additional funds needed (AFN). The firm is operating at full capacity. Data for use in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year? Dollars are in millions.

Last year's sales = $250
Sales growth rate = 28%
Last year's total assets = $450
Last year's profit margin = 4%
Last year's accounts payable = $30
Last year's notes payable = $40
Last year's accruals = $30
Target payout ratio = 50%

Answer 1

Formula for Additional Funds Needed(AFN):-

AFN = (Last year's Total Assets/Last Year's Sales)*Change in sales - (Last Year's Spontaneous Liab/Last Year's Sales)*Change in sales - [Forecasted sales*Last Year's Profit Margin*(1-Target Payout Ratio]

where, Forecasted sales = Last Year's Sales*(1+Sales growth rate)

= $250millions*(1+28%) = $320millions

Change in sales = Forecasted sales - Last Year's Sales

= $320millions - $250millions = $70millions

Last Year's Spontaneous Liab =Last Year's Accounts Payable +Last Year's Accured Liabilities (notes Payable are not part of Spontaneous Liab)

= $30millions + $30millions = $60millions

- Now, calculating AFN( Dollars are in millions):-

AFN = ($450/$250)*$70 - ($60/$250)*$70 - [$320*4%*(1-0.50)]

AFN = $126 - $16.8 - $6.4

AFN = $102.8

So, the AFN for the coming year is $102.8 millions