Question

You have been asked to forecast the additional funds needed (AFN) for Houston, Hargrove, & Worthington (HHW), which is planning its operation for the coming year. The firm is operating at full capacity. Data for use in the forecast are shown below. However, the CEO is concerned about the impact of a change in the payout ratio from the 10% that was used in the past to 65%, which the firm's investment bankers have recommended. Based on the AFN equation, by how much would the AFN for the coming year change if HHW increased the payout from 10% to the new and higher level? All dollars are in millions.

Last year's sales = S0	$300.0	Last year's accounts payable	$50.0
Sales growth rate = g	40%	Last year's notes payable	$15.0
Last year's total assets = A0*	$500	Last year's accruals	$20.0
Last year's profit margin = PM	20.0%	Initial payout ratio	10.0%

Select the correct answer.

a. $51.9

b. $46.2

c. $50.0

d. $48.1

e. $44.3

Answer 1

Answer (B)

For calculation of Additional Funds needed, let us assume the ratios remain constant Solution: Current Asset Growth in Sales Notes: Estimated Increase in Asset 1)The firm is operating at Full capacity 574 40% 2)The ratios remain constant 229.60 = Given Data: Estimated Increase in Liability Current Liabilty Growth in Sales Current Sales(S0) 300.00 65 40% Sales Growth(g) 40% 26.00 Projected Sales (Sales1) 420.00 Contibution of Projected Sales Profit Margin(PM) Profits- Payout 20% (Sales1 PM)- (Sales1 PM payout1%) Current Payout Ratio 10% (payout1) Sales1 PM (1- payout1 % ) - Required Payout Ratio 65% 420 20 % ( 1-65 % ) (payout2)

Current Assets(A0) 29.40 Assets+ Retained Earnings+ Accruals Current Assets(A0*) 500+54+20 Additional Fund Needed (AFN)= at 65% payout Estimated Increase in Asseet Estimated Increase in Liability Contibution of Projected Sales Current Assets(A0*) $574.00 229.60-26.00-29.40 Current Liabilties- Accounts Payable+ Notes Payable = $ 174.20 50+15 Current Liabilties= Additional Fund Needed (AFN) 40%-6540 % -420. 20 % ( 1-10 % ) S 65.00 Current Liabilties- 574 at 10% payout - $ 128.00 Change in AFN $174-$128 Change in AFN= 46.20 Answer Option (B)

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Current Assets(A0*) = Assets+ Retained Earnings + Accruals $ 29.40 Current Assets(A0*)= 500+54+20 Estimated Increase in Asset - Estimated Increase in Liability - Contibution of Projected Sales Additional Fund Needed (AFN)= at 65% payout Current Assets(A0* )= $574.00 = 229.60-26.00-29.40 Current Liabilties= Accounts Payable+ Notes Payable $ 174.20 Current Liabilties 50+15 Current Liabilties $ 65.00 574 . 40%-65-40%-420-20%*(1-10%) Additional Fund Needed (AFN)= at 10% payout = $ 128.00 Change in AFN= $174-$128 Change in AFN= $ 46.20 Answer = Option (B)