Question

Daniel Sawyer, the CEO of the Sawyer Group, is initiating 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 for use in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year? Dollars are in millions.

Last year's sales = S0	$350	Last year's accounts payable	$40
Sales growth rate = g	30%	Last year's notes payable	$50
Last year's total assets = A0*	$530	Last year's accruals	$30
Last year's profit margin = PM	5%	Target payout ratio	60%

Answer 1

given,

(in millions)

last year sales = S0 = $350

growth rate in sales = 30%

so Forecasted sales(S1) = last year sales + growth rate

    S1  = 350 + 30% = $455

change in sales = forecasted sales(S1) - last year sales(S0)

  S1 - S0 = 455 - 350 = $105

Given the firm is operating at full capacity

Last years total assets = A0* = $530

Accounts payable = $40

Accruals = $30

current level of liabilities = L0 = Payable + accruals = 40 + 30 = $70

profit margin = PM = 5%

target payout ratio = 60%

1 - payout ratio = retention ratio (b) = 1 - 0.06 = 0.4

Additional funds needed (AFN) = A0 x( change in sales / S0) - L0 x (change in sales / S0) - S1 x profit margin x retention ratio

AFN = 530 (105 / 350) - 70 (105 / 350) - 455 x 0.05 x 0.4

AFN = $159 - $21 - $9.1

= $128.9 million

(note: last years notes payable should  not be taken into account, because it is not a spontaneous source of funds)