Question

You have been asked to forecast the additional funds needed (AFN) for Houston, Hargrove, & Worthington (HHW), which is planning its operation for the coming year. The firm is operating at full capacity. Data for use in the forecast are shown below. However, the CEO is concerned about the impact of a change in the payout ratio from the 10% that was used in the past to 25%, which the firm's investment bankers have recommended. Based on the AFN equation, by how much would the AFN for the coming year change if HHW increased the payout from 10% to the new and higher level? All dollars are in millions. Last year's sales = S0 $300.0 Last year's accounts payable $50.0 Sales growth rate = g 40% Last year's notes payable $15.0 Last year's total assets = A0* $500 Last year's accruals $20.0 Last year's profit margin = PM 20.0% Initial payout ratio 10.0% Select the correct answer a. $12.6 b. $10.6 c. $11.6 d. $9.6 e. $13.6

Answer 1

	Last year	This year			Last year	This year
Sales	300.00	420.00		Sales	300.00	420.00
Profit margin	20%	20%		Profit margin	20%	20%
Profit	60.00	84.00		Profit	60.00	84.00
Payout ratio	10%	10%		Payout ratio	10%	25%
Dividends	6	8.4		Dividends	6	21
Assets	500.00	700		Assets	500.00	700
Notes payable	15.00	21		Notes payable	15.00	21
Accruals	20.00	28		Accruals	20.00	28
Retained earnings	54.00	75.60		Retained earnings	54.00	63.00
Equity	411.00	411.00		Equity	411.00	411.00
Total equity & liabilities	500.00	535.60		Total equity & liabilities	500.00	523.00
Need for AFN		164.40		Need for AFN		177.00
Change in AFN	12.60
So correct answer is a)$ 12.60