Question

           

Period        Variables	Current	Projected		Current	Projected		Current	Projected
Sales	$100,000	$120,000	Assets			Liab.&Own -ers’ Equ.
Cost	$ 75,000		Short Term	$60,000		Debt	$40,000
Net Income			Long Term	$20,000		Equity	$40,000

As we said in class all models are built on assumptions:

1     Dividend payout ratio is 50% therefore, the retention rate is the remainder

2      All assets and noninterest bearing liabilities vary is the same proportion as sales

3       Use the following equation to find the additional funding needed (AFN):

.

REQUIRED:

1. Find the AFN using the model equation above

2      Fill in the blanks in the table above.

3.     Write a paragraph on findings or conclusion after your perform the algorithmic modelling

Answer 1

Part 1

Sales revenue	$         100,000
Less: Cost	$           75,000
Net income	$           25,000
Projected sales	$120,000
Less: Current sales	$100,000
Increase in sales	$20,000
Divided by: Current sales	$100,000
% increase in sales	20%

Sales revenue	$         120,000
Less: Cost	$           90,000
Net income	$           30,000
Less: Dividend Declared (30000*50%)	$           15,000
Increase in retained earnings	$       15,000

Additional Funding Needed (AFN)
Increase in short term assets (60000*20%)	$           12,000
Increase in long term assets (20000*20%)	$             4,000
Less: Increase in retained earnings	$         (15,000)
Additional Funding Needed (AFN)	$             1,000

Part 2

Period   Variables	Current	Projected		Current	Projected		Current	Projected
									Sales	$100,000	$120,000	Assets			Liab.& Owners’ Equ.
Cost	$75,000	$         90,000	Short Term	$60,000	$ 72,000	Debt	$40,000	$ 41,000
Net Income	$25,000	$30,000	Long Term	$20,000	$ 24,000	Equity	$40,000	$ 55,000

Part 3

The company will be a need for an additional fund of $1,000 to grow its business at a 20% growth rate. However, there is no information about noninterest-bearing liabilities. Therefore, noninterest-bearing liabilities should be considered as zero. The cost will be increased with the same proportion as sales.