Question

Clayton Industries is planning its operations for next year. Ronnie Clayton, 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? Dollars are in millions.

Last year's sales = S0	$350		Last yr's accounts payable	$40
Sales growth rate = g	30%		Last yr's notes payable	$50
Last year's total assets = A0*	$360		Last yr's accruals	$30
Last year's prof margin = PM	5%		Target payout ratio	60%

a. $77.9

b. $67.0

c. $91.1

d. $78.7

e. $63.9

Answer 1

Answer is $77.90

Last Year:

Sales = $350
Total Assets = $360
Profit Margin = 5%

Retention Ratio = 1 - Payout Ratio
Retention Ratio = 1 - 0.60
Retention Ratio = 0.40

Spontaneous Current Liabilities = Accounts Payable + Accruals
Spontaneous Current Liabilities = $40 + $30
Spontaneous Current Liabilities = $70

Coming Year:

Sales = $350 + 30% * $350
Sales = $455

Addition to Retained Earnings = Sales * Profit Margin * Retention Ratio
Addition to Retained Earnings = $455 * 5% * 0.40
Addition to Retained Earnings = $9.10

Increase in Total Assets = $360 * 0.30
Increase in Total Assets = $108.00

Increase in Spontaneous Current Liabilities = $70 * 0.30
Increase in Spontaneous Current Liabilities = $21.00

Additional Fund Needed = Increase in Total Assets - Increase in Spontaneous Current Liabilities - Addition to Retained Earnings
Additional Fund Needed = $108.00 - $21.00 - $9.10
Additional Fund Needed = $77.90