Question

The company Jalil Corp is planning its operations in the coming year and the board of directors asked you to prepare a forecast regarding the Additional Fund Needed. The company operates at full capacity. The data used for the calculation of forecasting funding requirements is below. The Board of Directors plans a change in dividend policy, initially the Payout Ratio of 10% was increased to 50%.

Question

How much is the need for additional funds in the coming year based on the AFN (Additional Fund Needed) approach, if the dividend policy changes from a Payout Ratio of 10% to 50%.

Last year's sales = S0 = IDR 300.
Accounts payable last year was IDR 50.-
Sales growth rate = g = 40%
Notes payable last year was IDR 15.0
Last year's total assets = A0 * = IDR 500.0
Last year's accruals were IDR 20.0
Last year's profit margin = PM = 20.0%
Last year's payout ratio = 10.0%

Make an analysis and discuss the financial conditions above!

Answer 1

Solution:

The more formal equation for AFN is

Additional Funds Needed (AFN) = (A_O / S_O)ΔS – (L_O / S_O)ΔS – S1*PM *b

where,

1. A_O = Assets tied directly to sales
2. L_O = spontaneous liabilities that are affected by sales = 50+15+20 =85
3. S_O = the previous year’s sales
4. S1 = total projected sales for next year
5. ΔS = the change in sales between S0 and S1
6. PM = profit margin
7. S1 = new level of sales = (300+300*40%) = 420
8. b = the retention ratio from net income

Therefore,

AFN = (A_O / S_O)ΔS – (L_O / S_O)ΔS – S1*PM *b

AFN = (500/300) x (420-300) - (85/300) x(420-300) - (420*20% x 0.5)

AFN = 200 - 34 - 42

AFN = 124

Therefore AFN is IDR 124.

Jail Corp will need additional funds of IDR 124.

And the AFN would be lower, If the dividend payout ratio remained the same at 10% .

---------HOPE THIS IS HELPFUL