Question

Your firm wants to increase sales by 12% in 2020. 2019 sales were $1,800,000. The firm has $4,500,000 in total assets. The firm has $600,000 in accounts payable on its balance sheet, along with $250,000 in accruals. The firm has a 6% profit margin, and the firm typically pays out 10% of its net income. How much of the additional funds, if any, will be sourced from debt?

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= $1,800,000

Forecasted sales = Last Year's Sales*(1+% Increase) = $1800,000*(1+0.12) = $2016,000

Change in Sales = $2016,000 - $1,800,000 = $216,000

Last year's Total Assets = $4500,000

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

= $600,000 + $250,000 = $850,000

After-Tax Profit Margin = 6%

Payout Ratio = 10%

AFN = ($4500,000/$1800,000)*$216,000 - ($850,000/$1800,000)*$216,000 - [$2016,000*6%*(1-0.10)]

AFN = $540,000 - $102,000 - $108,864

AFN = $329,136

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