Last year's sales = S0 |
$200,000 |
Sales growth rate = g |
40% |
Last year's total assets = A0* |
$135,000 |
Last year's profit margin = PM |
20.0% |
Last year's accounts payable |
$50,000 |
Last year's notes payable |
$15,000 |
Last year's accruals |
$20,000 |
Target payout ratio |
25.0% |
Additional Funds Needed [AFN] for the coming year
Expected Next Year Sales
Expected Next Year Sales = Last year sales x (1 + Growth Rate)
= $200,000 x (1 + 0.40)
= $280,000
After Tax profit Margin
After Tax profit Margin = Expected Next Year Sales x Profit Margin
= $280,000 x 20%
= $56,000
Dividend Pay-out
Dividend Pay-out = After Tax profit Margin x Dividend Pay-out Ratio
= $56,000 x 25%
= $14,000
Additions to Retained Earnings
Additions to Retained Earnings = After Tax profit Margin - Dividend Pay-out
= $56,000 - $14,000
= $42,000
Increase in Total Assets
Increase in Total Assets = Total Assets x Percentage of Increase in sales
= $135,000 x 40%
= $54,000
Increase in Spontaneous liabilities
Increase in Spontaneous liabilities = [Accounts Payable + Accruals] x Percentage of Increase in sales
= [$50,000 + $20,000] x 40%
= $70,000 x 40%
= $28,000
Additional Funds Needed [AFN]
Therefore, the Additional Funds Needed [AFN] = Increase in Total Assets – Increase in in Spontaneous liabilities – Additions to retained earnings
= $54,000 - $28,000 - $42,000
= -$16,000 (Negative AFN)
“Hence, the Additional Funds Needed (AFN) for the coming year would be -$16,000 (Negative AFN)”
In your internship with LLT Inc. you have been asked to forecast the firm's additional funds...
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