Question

Safelight is planning its operations for the coming year, and the CFO wants you to forecast the firm's additional funds needed (AFN). Data for use in the forecast are shown below. Based on the AFN equation, by how much would the AFN for the coming year change (indicate an increase or a decrease in AFN) if Safelight increased the dividend payout ratio from 20% to 25% and net profit margin decreased from 20% to 15%? All dollars are in millions.

Last year's sales = S0	$300		Last year's accounts payable	$50.0
Sales growth rate = g	10%		Last year's notes payable (to bank)	$15.0
Last year's spontaneous assets = A*	$500		Last year's accruals	$20.0
Last year's profit margin = PM	20.0%		Initial dividend payout ratio	20.0%
Expected profit margin = PM new	15%		New dividend payout ratio	25.0%

Answer 1

We can calculate the Aditional Funds needed as follows:

Additional Funds needed = Increase in Spontaneous Assets - Increase in Spontaneous Liabilities - Increase in retained earnings

Formulas used in the excel sheet are:

So, the Additional Funds required will be $ 5.88 Million. So, there will be increase in requirement of Additional Funds.