Question

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* $660 Last year's accruals $30 Last year's profit margin = PM 5% Target payout ratio 60%

Answer 1

Computation of AFN (Additional Funds Needed)

1. Computation of Net Income added to Retained earnings

Net Income added to Retained earnings = New Sales * Profit Margin * (1 - Payout ratio)

Net Income added to Retained earnings = $350 * 1.30 * 5% * (1 - 0.60)

Net Income added to Retained earnings = $9.10

2. Computation of AFN = Assets * Growth Rate - Spontaneous Liabilities * Growth rate - Addition to Retained earnings

AFN = $660 * 30% - (40 + 30) * 30% - $9.10

AFN = $198 - $21 - $9.10

AFN = $167.90

AFN for the coming year = $167.90

Notes payable is not a spontaneous liability (Because it doesn't changes with the sales value) thus the same is not included in the calculation.

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