Question

Your firm recorded sales for the most recent year of $10 million generated from an asset base of $7 million, producing a $500,000 net income. Sales are projected to grow at 20%, causing spontaneous liabilities to increase by $200,000. In the most recent year, $200,000 was paid out as dividends, and the current payout ratio will continue in the upcoming years. What is your firm’s AFN?

Hint:

g = growth rate of sales = ??

S0 = current sales = ??

S1 = new sales = S0 * (1+g) = ??

A0 = current asset = ??

NI0 = current profit = ??

NI0 / S0 = current profit margin = ??

RR0 = Retention ratio = 1 - Dividend / Net profit = ??

Change of Assets = A0 * g= ??

Change of Liability = ??

Addition to Retained Earnings = S1 * (NI0 / S0) * RR0 = ??

AFN = Change of Assets - Change of Liabilities - Addition to Retained Earnings = ??

Answer 1

Growth Rate, g = 20%

Current Sales, S0 = $10,000,000

New Sales, S1 = S0 * (1 + g)
New Sales, S1 = $10,000,000 * 1.20
New Sales, S1 = $12,000,000

Current Asset, A0 = $7,000,000
Current Profit, NI0 = $500,000

Current Profit Margin = NI0 / S0
Current Profit Margin = $500,000 / $10,000,000
Current Profit Margin = 5.00%

Retention Ratio, RR0 = 1 - Dividend / Net Profit
Retention Ratio, RR0 = 1 - $200,000 / $500,000
Retention Ratio, RR0 = 0.60

Change of Assets = A0 * g
Change of Assets = $7,000,000 * 20%
Change of Assets = $1,400,000

Change of Liability = $200,000

Addition to Retained Earnings = S1 * (NI0 / S0) * RR0
Addition to Retained Earnings = $12,000,000 * 5.00% * 0.60
Addition to Retained Earnings = $360,000

Additional Fund Needed = Change of Assets - Change of Liabilities - Addition to Retained Earnings
Additional Fund Needed = $1,400,000 - $200,000 - $360,000
Additional Fund Needed = $840,000