Question

The CFO of Rosecurity, is 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 (in millions) for use in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year (in millions)? Last year's sales = $350, Last year's accounts payable = $40, Sales growth rate = 3%, Last year's notes payable = $50, Last year's total assets = $500, Last year's accruals = $30, Last year's profit margin = 3%, Target payout ratio = 57%

Answer 1

Additional Funds Needed [AFN] for the coming year

Expected Next Year Sales

Expected Next Year Sales = Last year sales x (1 + Growth Rate)

= $350 Million x (1 + 0.03)

= $350 Million x (1.03

= $360.50 Million

After Tax profit Margin

After Tax profit Margin = Expected Next Year Sales x Profit Margin

= $360.50 Million x 3.00%

= $10.82 Million

Dividend Pay-out

Dividend Pay-out = After Tax profit Margin x Dividend Pay-out Ratio

= $10.82 Million x 57%

= $6.17 Million

Additions to Retained Earnings

Additions to Retained Earnings = After Tax profit Margin - Dividend Pay-out

= $10.82 Million - $6.17 Million

= $4.65 Million

Increase in Total Assets

Increase in Total Assets = Total Assets x Percentage of Increase in sales

= $500 Million x 3.00%

= $15.00 Million

Increase in Spontaneous liabilities

Increase in Spontaneous liabilities = [Accounts Payable + Accruals] x Percentage of Increase in sales

= [$40 Million + $30 Million] x 3.00%

= $70 Million x 3.00%

= $2.10 Million

Additional Funds Needed [AFN]

Therefore, the Additional Funds Needed [AFN] = Increase in Total Assets – Increase in in Spontaneous liabilities – Additions to retained earnings

= $15.00 Million - $2.10 Million - $4.65 Million

= $8.25 Million

“Hence, the Additional Funds Needed (AFN) for the coming year will be $8.25 Million”