Question

How to arrive at the solution below for this pratice problem? Solution: -22,037,756.82

Assuming the firm is operating at only 50% capacity and using the data in the table below, forecast Orwell's AFN for the coming year? Last year's sales = S0 $136,000 Last year's accounts payable $40,000 Sales growth (ΔS) $9,000 Last year's notes payable $10,000 Last year's total assets = A0* $248,000 Last year's accruals $10,000 Last year's profit margin = PM 0.03 Target payout ratio 0

Answer 1

AFN means Additional Funds Nedded. It focus on the funds needed for new assets to generate needed increase in sales.

AFN = Projected Increase in Assets – Projected Increase in Spontaneous Liabilities – Any increase in retained earnings

Projected Increase in Assets = A0 * (ΔS/S0)

Projected Increase in Spontaneous Liabilities = L0 * (ΔS/S0)

Projected Increase in Retained Earnings = S1 * PM * b

(Here; A0= Current Level of Assets, ΔS= Change in Sales, S0= Current Sales, L0= Current Level of spontaneous Liabilities, S1= Desired Level of Sales, PM= Profit Marging, B= Retention Ratio (1 – payout Ratio)

Step-1 Calculate Projected Increase in Sales

= 248000 * (9000 / 136000) = 16,411.76

Step-2 Calculate Projected Increase in Spontaneous Liabilities

= (40000 + 10000) * (9000 / 136000) = 3308.82

Step-3: Projected Increase in Retained Earnings:

= (136000 + 9000) * 0.03 * 1 = 4350

AFN = 16,411.76 – 3308.82 – 4350 = $8,752.94