Question

In: Finance

Fuzzy Button Clothing Company reported sales of $720,000 at the end of last year; but this...

Fuzzy Button Clothing Company reported sales of $720,000 at the end of last year; but this year, sales are expected to grow by 9%. Fuzzy Button expects to maintain its current profit margin of 21% and dividend payout ratio of 15%. The firm’s total assets equaled $500,000 and were operated at full capacity. Fuzzy Button’s balance sheet shows the following current liabilities: accounts payable of $75,000, notes payable of $25,000, and accrued liabilities of $70,000. Based on the AFN (Additional Funds Needed) equation, what is the firm’s AFN for the coming year?

-$129,764

-$118,951

-$124,358

-$108,137

A negatively-signed AFN value represents:

A. A shortage of internally generated funds that must be raised outside the company to finance the company’s forecasted future growth

B. A surplus of internally generated funds that can be invested in physical or financial assets or paid out as additional dividends

C. A point at which the funds generated within the firm equal the demands for funds to finance the firm’s future expected sales requirements

Because of its excess funds, Fuzzy Button is thinking about raising its dividend payout ratio to satisfy shareholders. What percentage of its earnings can Fuzzy Button pay to shareholders without needing to raise any external capital? (Hint: What can Fuzzy Button increase its dividend payout ratio to before the AFN becomes positive?)

60.5

72.5

56.4

80.6

Solutions

Expert Solution

EXTERNAL FINANCING NEEDED (EFN) =108,137

B. A surplus of internally generated funds that can be invested in physical or financial assets or paid out as additional dividends

DIVIDEND PAYOUT RATIO (DP RATIO) = 80.6%

a)

Assets tied directly to sales 5,00,000
liabilities affected by sales 1,45,000 =70,000+75,000
previous yeay sales 7,20,000
projected sales for next year 7,84,800 =720,000x(1.09)
change in sales 64800 =784,800 -720,000
projected net income 1,64,808 =784,800x21%
retention ratio 85% =1-15%
external financing needed -108136.8 =(500,000/720,000)x64,800-(145,000/720,000)x64,800-784,800x21%x85%)

b)

B. A surplus of internally generated funds that can be invested in physical or financial assets or paid out as additional dividends

c)

dividend payout ratio = (projected net income x15%)+external financing needed / projected net income

=(164,808 x15%) + 108,136 / 164,808

=80.6%

NOTE - PLEASE APPRECIATE THE WORK

jeff jeffy answered 1 year ago
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