Question

Kitty Company is planning its operations for next year, and the CEO wants you to forecast the firm's additional funds needed (AFN). 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*	$127,500		Last year's accruals	$20,000
Last year's profit margin = PM	20.0%		Target payout ratio	25.0%

Answer 1

AFN = (A0/S0)*Change in sales-(L0/S0)*Change in sales-M*S1*(1-Payout ratio)

Given,

A0 = Last year's total assets = 127,500

S0 = Last year sales = 200,000

S1 = Current years sales = Last year sales+Growth in sales

= 200,000+200,000*40%

= 200,000+80,000

= 280,000

L0 = Last year liabilities = 50,000+15,000+20,000 = 85,000

Change in sales = S1-S0 = 280,000-200,000=80,000

M = Profit margin = 20%

Payout ratio = 25%

AFN = (127,500/200,000)*80,000-(85,000/200,000)*80,000-0.20*280,000*(1-0.25)

= 0.6375*80,000-0.425*80,000-56,000*0.75

= 51,000-34,000-42,000

= 51,000-76,000

= -25,000

Additional funds needed (AFN) = 25,000