Homework Answers
Answers for part a are already done and are correct. Hence only answer b is given below:
Answer b:
Working:
Let us calculate AFN:
∆ Sales = 3100000 * 25% = $775,000
Projected sales = Sales + ∆ Sales = 3,100,000 + 775,000 = $3,875,000
AFN = (Assets / Sales) * ∆ Sales - (Spontaneous liabilities / Sales) * ∆ Sales - Projected Sales * After-tax profit margin * (1 - Dividend Payout ratio)
= 2300000 / 3100000 * 775000 - 340000 / 3100000 * 775000 - 3875000* 7% * (1 - 40%)
= $327,250
New common stock to be issued in 2020 = $100,000
New long-term debt = AFN - New stock =327250 - 100000 = $227,250
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