Question

Bob, the CFO of Bob Supply 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 = $350   

Last year’s accounts payable = $40

Sales growth rate = 20%

Last year’s notes payable = $50

Last year’s total assets = $500

Last year’s accruals= $30

Last year’s profit margin = 5%

Target payout ratio = 50%

Answer 1

Formula for additional funds needed is:

AFN = A₀/S₀ (S₁ – S₀) – (L₀/S₀) (S₁ – S₀) – PM (S₁) (b)

Where,

S₀ = Last year’s sales = $ 350,000,000          

g = Forecasted growth rate in sales = 20 %

S₁ = Forecasted sales = S₀ (1+g) = $ 350,000,000 x (1+ 0.20) = $ 350,000,000 x 1.20 = $ 420,000,000

A₀ = Assets at time 0 which vary directly with sales = $ 500,000,000

L₀ = Liability at time 0 which vary directly with sales = Account payable + Accruals

                                                                          = $ 40,000,000 + $ 30,000,000 = $ 70,000,000

PM = Profit margin = 5% or 0.05

b = Retention ratio = 1- payout ratio = 1- 50 % = 1 – 0.5 = 0.5

Substituting all the value in the above formula we get AFN as:

AFN = ($ 500,000,000/$ 350,000,000) x ($ 420,000,000 – $ 350,000,000) – ($ 70,000,000/$ 350,000,000) x ($ 420,000,000 – $ 350,000,000) – 0.05 x $ 420,000,000 x 0.5

       = (1.42857142857143 x $ 70,000,000) – (0.2 x $ 70,000,000) – $ 10,500,000

       = $ 100,000,000 – $ 14,000,000 – $ 10,500,000

       = $ 75,500,000

Additional funds needed is $ 75,500,000