Question

(All are stated in million dollars)

Quantum Inc. Balance Sheet		2020	2019	Quantum Inc. Balance Sheet			2020	2019
Cash and cash equivalents		2,768	2,879	Accounts payable			8,022	7,251
Accounts receivable		6,275	5,335	Accruals			9,290	8,559
Total inventories		7,379	6,384	Notes Payables			9,981	8,472
Prepaid expenses		5,548	4,184	Long-term debt			22,033	21,360
TOTAL CURRENT ASSETS		21,970	18,782	Other borrowings			21,027	21,091
Net Property Plants (Net PPE)		21,293	19,244	Common stock+ paid in Cap			58,134	58,134
Intangible assets		95,091	90,146	Retained earnings			9,867	3,305
TOTAL ASSETS		138,354	128,172	TOTAL LIAB & EQUITY			138,354	128,172
	Quantum Inc. Income Statement			2020	2019
	NET SALES			82,559	78,938
	Cost of products sold			40,768	37,919
	Selling, general and administrative expense			23,135	21,890
	Depreciation expense			2,838	3,108
	OPERATING INCOME			15,818	16,021
	Interest expense			629	974
	EARNINGS BEFORE INCOME TAXES			15,189	15,047
	Income taxes			3,392	3,360
	NET INCOME			11,797	11,687
	Total Dividends Payments			5,235	5,186

Suppose the expected growth of net sales for 2021 is 8%, calculate the Quantum Inc. Additional Fund Needed (AFN) for 2021 based on the 2020 status quo. Also, please carefully explain the meaning of the projected 2021 AFN that you calculated.

Answer 1

Additional Fund needed for 2021 = (Total assets 2020/Sales 2020)*(change in sales) - (Total current liabilities 2020/Sales 2020)*(change in sales) - [(Profit margin 2020*Sales 2021*(1 - 2020's dividend payout ratio)]

change in sales = Sales in 2020*expected growth of sales in 2021 = 82,559*8% = 6,604.72

Total current liabilities 2020 = Accounts payable + Accruals + Notes payables = 8,022 + 9,290 + 9,981 = 27,293

Profit margin 2020 = Net income/Net sales = 11,797/82,559 = 0.1429 or 14.29

sales 2021 = Sales in 2020*(1+expected growth of sales in 2021) = 82,559*(1+0.08) = 82,559*1.08 = 89,163.72

2020's dividend payout ratio = Dividend paid/Net income = 5,235/11,797 = 0.4438 or 44.38%

Additional Fund needed for 2021 = (138,354/82,559)*6,604.72 - (27,293/82,559)*6,604.72 - [(0.1429*89,163.72*(1-0.4438)] = (1.675819716808585*6,604.72) - (0.3305878220424181*6,604.72) - (0.1429*89,163.72*0.5562) = 11,068.32 - 2,183.44 - 7,086.82 = 1,798.06

Quantum Inc. Additional Fund Needed (AFN) for 2021 based on the 2020 status quo is 1,798.06.

the meaning of the projected 2021 AFN of 1,798.06 is that to grow sales by 8% in 2021, Quantum Inc. will need 1,798.06 of additional fund to achieve that growth in sales. these fund could be needed in investment in Net property, plants and/or working capital.