In your internship with Lewis, Lee, & Taylor Inc. you have been asked to forecast the firm's additional funds needed (AFN) for next year. 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? Last year's sales = S0 $200,000 Last year's accounts payable $50,000 Sales growth rate = g 40% Last year's notes payable $15,000 Last year's total assets = A0* $115,000 Last year's accruals $20,000 Last year's profit margin = PM 20.0% 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)
= $200,000 x 1.40
= $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
= $115,000 x 40%
= $46,000
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
= $46,000 - $28,000 - $42,000
= -$24,000 (Negative)
“Hence, the Additional Funds Needed (AFN) for the coming year will be -$24,000 (Negative)”
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