Question

1) The following information is available for Natural Cleaning Services (NCS): • Company sales are expected to increase by 20% from $10 million in 2019 to $12 million in 2020. • Assets totaled $7 million at the end of 2019. • NCS is at full capacity and its assets must grow at the same rate as sales. • At the end of 2019, current liabilities were $2.2 million, consisting of $750,000 of accounts payable, $600,000 of notes payable and $850,000 of accruals. • The after-tax profit margin is forecasted to be 10% and the forecasted payout ratio is 35%. Use the AFN equation to forecast NCS’s additional funds needed for 2020:

Answer 1

Additional Funds Needed [AFN] for 2020

Expected Next Year Sales = $12,000,000

After Tax profit Margin

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

= $12,000,000 x 10%

= $1,200,000

Dividend Pay-out

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

= $1,200,000 x 35%

= $420,000

Additions to Retained Earnings

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

= $1,200,000 - $420,000

= $780,000

Increase in Total Assets

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

= $7,000,000 x 20%

= $1,400,000

Increase in Spontaneous liabilities

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

= [$750,000 + $850,000] x 20%

= $1,600,000 x 20%

= $320,000

Additional Funds Needed [AFN]

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

= $1,400,000 - $320,000 - $780,000

= $300,000

Therefore, the Additional Funds Needed (AFN) for 2020 is $300,000