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* | $540 | Last year's accruals | $30 |
Last year's profit margin = PM | 5% | Target payout ratio | 60% |
Select the correct answer.
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Additional Funds Needed [AFN] for the coming year
Expected Next Year Sales
Expected Next Year Sales = Last year sales x (1 + Growth Rate)
= $350 Million x (1 + 0.30)
= $350 Million x 1.30
= $455.00 Million
After Tax profit Margin
After Tax profit Margin = Expected Next Year Sales x Profit Margin
= $455.00 Million x 5.00%
= $22.75 Million
Dividend Pay-out
Dividend Pay-out = After Tax profit Margin x Dividend Pay-out Ratio
= $22.75 Million x 60%
= $13.65 Million
Additions to Retained Earnings
Additions to Retained Earnings = After Tax profit Margin - Dividend Pay-out
= $22.75 Million - $13.65 Million
= $9.10 Million
Increase in Total Assets
Increase in Total Assets = Total Assets x Percentage of Increase in sales
= $540 Million x 30%
= $162.00 Million
Increase in Spontaneous liabilities
Increase in Spontaneous liabilities = [Accounts Payable + Accruals] x Percentage of Increase in sales
= [$40 Million + $30 Million] x 30%
= $70 Million x 30%
= $21.00 Million
Additional Funds Needed [AFN]
Therefore, the Additional Funds Needed [AFN] = Increase in Total Assets – Increase in in Spontaneous liabilities – Additions to retained earnings
= $162.00 Million - $21.00 Million - $9.10 Million
= $131.90 Million
“Hence, the Additional Funds Needed (AFN) for the coming year will be $131.90 Million “
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