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%

Answer 1

Last Year:

Sales = $200,000
Total Assets = $135,000
Profit Margin = 20.00%

Retention Ratio = 1 - Payout Ratio
Retention Ratio = 1 - 0.25
Retention Ratio = 0.75

Spontaneous Current Liabilities = Accounts Payable + Accruals
Spontaneous Current Liabilities = $50,000 + $20,000
Spontaneous Current Liabilities = $70,000

Next Year:

Sales = $200,000 + 40% * $200,000
Sales = $280,000

Addition to Retained Earnings = Sales * Profit Margin * Retention Ratio
Addition to Retained Earnings = $280,000 * 20.00% * 0.75
Addition to Retained Earnings = $42,000

Increase in Total Assets = $135,000 * 0.40
Increase in Total Assets = $54,000

Increase in Spontaneous Current Liabilities = $70,000 * 0.40
Increase in Spontaneous Current Liabilities = $28,000

Additional Fund Needed = Increase in Total Assets - Increase in Spontaneous Current Liabilities - Addition to Retained Earnings
Additional Fund Needed = $54,000 - $28,000 - $42,000
Additional Fund Needed = -$16,000