Question

In your internship with Lewis, Lee, & Taylor Inc. you have been asked to forecast the firm's additional funds needed (AFN) for next year. 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?

Last year's sales = S0 $200,000

Last year's accounts payable $50,000

Sales growth rate = g 40%

Last year's notes payable $15,000

Last year's total assets = A0* $110,000

Last year's accruals $20,000

Last year's profit margin = PM 20.0%

Target payout ratio 25.0%

Select the correct answer. a. - $26,100 b. - $26,000 c. - $25,950 d. - $26,050 e. - $26,150

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)

= $200,000 x (1 + 0.40)

= $200,000 x 1.40

= $280,000

After Tax profit Margin

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

= $280,000 x 20%

= $56,000

Dividend Pay-out

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

= $56,000 x 25%

= $14,000

Additions to Retained Earnings

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

= $56,000 - $14,000

= $42,000

Increase in Total Assets

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

= $110,000 x 40%

= $44,000

Increase in Spontaneous liabilities

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

= [$50,000 + $20,000] x 40%

= $70,000 x 40%

= $28,000

Additional Funds Needed [AFN]

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

= $44,000 - $28,000 - $42,000

= -$26,000 (Negative)

“Hence, the Additional Funds Needed (AFN) for the coming year will be -$26,000 (Negative)”