Accounting AFN

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*	$152,500	Last year's accruals	$20,000
Last year's profit margin = PM	20.0%	Target payout ratio	25.0%

Select the correct answer.

a. - $9,000

b. - $9,010

c. - $9,030

d. - $9,020

e. - $8,990

Expert Solution

AFN = Increased in Assets - Increased in Liabilities - Addition to Retained Earnings

= [Current Level of Spontaneous Assets * Sales Growth] - [Current Level of Spontaneous Liabilities * Sales Growth] - [New Level of Sales * Profit Margin * Retention Ratio]

= [$152,500 * 0.40] - [($50,000 + $20,000) * 0.40] - [{$200,000 * (1 + 0.40)} * 0.20 * (1 - 0.25)]

= $61,000 - $28,000 - $42,000 = -$9,000

Option a. -$9000

Rahul Kumar Agarwal answered 3 years ago

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