Cash 20 AccountsPayable 20 AccountsReceivable 20 NotesPayable 40 Inventory 20 Lo
ID: 2661472 • Letter: C
Question
Cash 20 AccountsPayable 20 AccountsReceivable 20 NotesPayable 40 Inventory 20 LongTermDebt 80 FixedAssets 180 CommonStock 80 RetainedEarnings 20 TotalAssets 240 TotalLiabilities and Equity 240 Sales for the year just ended were $400, and fixed assets wereused at 80% of capacity, but its current assests were at optimallevels. Sales are expected to grow by 5% next year, the profitmargin is 5% and the dividend payout ratio is 60%. How muchadditional funds (AFN) will be needed? Cash 20 AccountsPayable 20 AccountsReceivable 20 NotesPayable 40 Inventory 20 LongTermDebt 80 FixedAssets 180 CommonStock 80 RetainedEarnings 20 TotalAssets 240 TotalLiabilities and Equity 240 Sales for the year just ended were $400, and fixed assets wereused at 80% of capacity, but its current assests were at optimallevels. Sales are expected to grow by 5% next year, the profitmargin is 5% and the dividend payout ratio is 60%. How muchadditional funds (AFN) will be needed?Explanation / Answer
Additional Funds Needed(AFN) = (A*/S0)S –(L*/S0)S – M(S1)(RR)
A* = Assets tied directly to sales
S0 = Last year’s Sales
S1 = Next year’s projectedsales
S = Increase in Sales; (S1 –S0)
L* = Liabilities that spontaneouslyincrease with sales
A*/S0 = Assets required tosupport sales; “ Capital Intensity Ratio”
L*/S0 = Spontaneous liabilitiesratio
M = Profit Margin (NetIncome / Sales)
RR = Retention ratio; (equal to1-dividend payout ratio)
S = $420 - $400 = $20
A*/S0 = $240 /$400 = 0.60
L*/S0 = $3 / $400 =0.0075
($20 + $40 = $60 * 0.05 = $3)
M = 5% (or) 0.05
RR = 1- dividend payout ratio = 1-0.60 = 0.40
Additional Funds Needed(AFN) = (A*/S0)S –(L*/S0)S – M(S1)(RR)
AFN = 0.60 * $20 - 0.0075 *$20 - 0.05 * $420 * 0.40
AFN = $12 - 0.15 – 8.4
AFN = $3.45
Additional funds needed (AFN) = $3.45