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* $135,000 Last year's accruals $20,000 Last year's profit margin = PM 20.0% Target payout ratio 25.0% Group of answer choices −$14,440 −$15,200 −$16,000 −$16,800 −$17,640

Answer 1

Formula for Additional funds Needed:-

AFN = (Last year's Total Assets/Last Year's Sales)*Change in sales - (Last Year's Spontaneous Liab/Last Year's Sales)*Change in sales - [Forecasted sales*After-Tax Profit Margin*(1-Payout Ratio]

where, Last Year's Sales= $200,000

Forecasted sales = Last Year's Sales*(1+growth rate) = $200,000*(1+0.40)

= $280,000

Change in Sales = $280,000 - $200,000 = $80,000

Last year's Total Assets = $135,000

Spontaneous Liab = Accounts Payable + Accured Liabilities (notes Payable are not part of Spontaneous Liab)

= $50,000 + $20,000 = $70,000

After-Tax Profit Margin = 20%

Payout Ratio = 25%

AFN = ($135,000/$200,000)*$80,000 - ($70,000/$200,000)*$80,000 - [$280,000*20%*(1-0.25)]

AFN = $54,000 - $28,000 - $42,000

AFN = -$16,000

So, the AFN for the coming year is -$16,000

Option 3

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