Question

(a) Daniel Sawyer, the CEO of the Sawyer Group, is initiating planning for the company's operations next year, and he wants you to forecast the firm's additional funds needed (AFN). 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? Dollars are in millions.

Last year's sales = S0	$350	Last year's accounts payable	$40
Sales growth rate = g	30%	Last year's notes payable	$50
Last year's total assets = A0*	$500	Last year's accruals	$30
Last year's profit margin = PM	5%	Target payout ratio	60%

(b) Weber Interstate Paving Co. had $450 million of sales and $225 million of fixed assets last year, so its FA/Sales ratio was 50%. However, its fixed assets were used at only 65% of capacity. If the company had been able to sell off enough of its fixed assets at book value so that it was operating at full capacity, with sales held constant at $450 million, how much cash (in millions) would it have generated?

Answer 1

b.

Answer 2

Solution to the FIRST QUESTION

Additional Funds Needed [AFN] for the coming year

Expected Next Year Sales

Expected Next Year Sales = Last year sales x (1 + Growth Rate)

= $350 x (1 + 0.30)

= $350 x 1.30

= $455

After Tax profit Margin

After Tax profit Margin = Expected Next Year Sales x Profit Margin

= $455 x 5.00%

= $22.75

Dividend Pay-out

Dividend Pay-out = After Tax profit Margin x Dividend Pay-out Ratio

= $22.75 x 60%

= $13.65

Additions to Retained Earnings

Additions to Retained Earnings = After Tax profit Margin - Dividend Pay-out

= $22.75 – 13.65

= $9.10

Increase in Total Assets

Increase in Total Assets = Total Assets x Percentage of Increase in sales

= $500 x 30%

= $150.00

Increase in Spontaneous liabilities

Increase in Spontaneous liabilities = [Accounts Payable + Accruals] x Percentage of Increase in sales

= [$40 + $30] x 30%

= $70 x 30%

= $21.00

Additional Funds Needed [AFN]

Therefore, the Additional Funds Needed [AFN] = Increase in Total Assets – Increase in in Spontaneous liabilities – Additions to retained earnings

= $150.00 - $21.00 - $9.10

= $119.90

“Hence, the Additional Funds Needed (AFN) for the coming year will be $119.90”

PLEASE BE NOTED (More than 1 Question)

Answer 3

a.