In your internship with Lewis, Lee, & Taylor Inc. you have been asked to forecas
ID: 2415116 • Letter: I
Question
In your internship with Lewis, Lee, & Taylor Inc. you have been asked to forecast the firm's additional funds needed (AFN) for next year. 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? Last year's sales = S0 $200,000 Last year's accounts payable $50,000 Sales growth rate = g 20% Last year's notes payable $15,000 Last year's total assets = A0* $135,000 Last year's accruals $20,000 Last year's profit margin= PM 10.0% Target payout ratio 50.0%
Explanation / Answer
ADDITIONAL FUND NEEDED
= Ao * (S / So) Lo * (S / So) - S1 * PM * b
Ao = current level of assets
S/So = percentage increase in sales i.e. change in sales divided by current sales
Lo = current level of liabilities
S1 = new level of sales
PM = profit margin
b = retention rate = 1 – payout rate
AFN = $135000 * (0.20) - ($50000 + $20000) * (0.20) - ($200000 * 120%) * 0.10 * 0.50
= $27000 - $14000 - $12000
= $1000