In your internship with Lewis, Lee, & Taylor Inc. you have been asked to forecas
ID: 2800028 • 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?
Select the correct answer.
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* $135,000 Last year's accruals $135,000 Last year's profit margin = PM 20.0% Target payout ratio 25.0%Explanation / Answer
Last Year:
Sales, S0 = $200,000
Profit Margin, PM = 20%
Payout Ratio = 25%
Total Assets, A0* = $135,000
Spontaneous Liabilities, L0 = Accounts Payable + Accruals
Spontaneous Liabilities, L0 = $50,000 + $135,000
Spontaneous Liabilities, L0 = $185,000
Next Year:
Growth rate, g = 40%
Next Year Sales, S1 = S0 * (1+g)
Next Year Sales, S1 = $200,000 * 1.40
Next Year Sales, S1 = $280,000
Net Income = S1 * PM
Net Income = $280,000 * 20%
Net Income = $56,000
Dividend = Net Income * Payout Ratio
Dividend = $56,000 * 25%
Dividend = $14,000
Additions to Retained Earnings = Net Income - Dividend
Additions to Retained Earnings = $56,000 - $14,000
Additions to Retained Earnings = $42,000
Increase in Total Assets = A0 * g
Increase in Total Assets = $135,000 * 0.40
Increase in Total Assets = $54,000
Increase in Spontaneous Liabilities = L0 * g
Increase in Spontaneous Liabilities = $185,000 * 0.40
Increase in Spontaneous Liabilities = $74,000
AFN = Increase in Total Assets - Increase in Spontaneous Liabilities - Additions to Retained Earnings
AFN = $54,000 - $74,000 - $42,000
AFN = -$62,000