Question

Daniel Sawyer, the CEO of the Sawyer Group, is initiating planning for the company's operations next year, and he wants you to forecast the firm's additional funds needed (AFN). 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? Dollars are in millions.

Last year's sales = S0	$350	Last year's accounts payable	$40
Sales growth rate = g	30%	Last year's notes payable	$50
Last year's total assets = A0*	$690	Last year's accruals	$30
Last year's profit margin = PM	5%	Target payout ratio	60%

Select the correct answer.

a. $180.4

b. $169.9

c. $173.4

d. $166.4

e. $176.9

Answer 1

Last year's sales = S0	$350	Last year's accounts payable	$40
Sales growth rate = g	30%	Last year's notes payable	$50
Last year's total assets = A0*	$690	Last year's accruals	$30
Last year's profit margin = PM	5%	Target payout ratio	60%

Formula for Additional Funds Needed(AFN):-

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

where, Change in Sales = Last year's sales*Sales growth rate

=$350 millions*30%

=$105 million

Spontaneous Liabilities = Accounts Payable + Accruals

=$40 million + $30 million

=$70 million

Note - (Notes Payable are not part of Spontaneous Liab)

Forecasted Sales = Last year's sales*(1+Sales growth rate)

=$350 million*(1+0.30)

=$455 million

Calculating AFN: (Amounts in millions)

= [($690/$350)*$105] - [($70/$350)*$105] - [$455*5%*(1-0.60)]

= $207 - $21 - $9.1

=$176.9

So, the AFN for the coming year is $176.9 millions

Hence, Option E

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