Question

In: Finance

Cash 20 Accounts payable 20 Accounts Receivable 30 Notes payable 50 Inventory 30 Long-term debt 80...

Cash	20	Accounts payable	20
Accounts Receivable	30	Notes payable	50
Inventory	30	Long-term debt	80
Net Fixed assets	180	Common Stock	90
		Retained Earnings	20
Total assets	260	Total liabilities and equity	260

Sales for the year just ended were 400. The firm is operating at much less than full capacity, so it will not need to increase fixed assets. Sales are expected to grow by 5% next year, the profit margin is 6%, and the dividend payout ratio is 60%. How much additional funding will be needed by the firm?

Expert Solution

Additional Funds Needed [AFN] for the coming year

Expected Next Year Sales

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

= 400 x (1 + 0.04)

= 400 x 1.04

= 420

After Tax profit Margin

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

= 420 x 6.00%

= 25.20

Dividend Pay-out

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

= 25.20 x 60%

= 15.12

Additions to Retained Earnings

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

= 25.20 – 15.12

= 10.08

Increase in Total Assets

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

= 260 x 4.00%

= 13.00

Increase in Spontaneous liabilities

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

= [20 + 50] x 4.00%

= 70 x 4.00%

= 3.50

Additional Funds Needed [AFN]

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

= 13.00 - $3.50 – 10.08

= -0.58 (Negative)

“Hence, the Additional Funds Needed (AFN) for the coming year will be -0.58 (Negative)”

jeff jeffy answered 4 months ago

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