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* | $117,500 | Last year's accruals | $20,000 |
Last year's profit margin = PM | 20.0% | Target payout ratio | 25.0% |
Select the correct answer.
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Answer:
Last year’s Sales = $200,000
Growth Rate = 40%
Expected Sales in next year = $200,000 * (1 + 0.40)
Expected Sales in next year = $280,000
Retention ratio = 1 – Dividend payout ratio
Retention ratio = 1 – 0.250
Retention ratio = 0.750 or 75.0%
Addition to Retained Earnings = Sales * Profit Margin *
Retention Ratio
Addition to Retained Earnings = $280,000 * 20.0% * 75.0%
Addition to Retained Earnings = $42,000
Increase in Total Assets = $117,500 * 0.40
Increase in Total Assets = $47,000
Increase in Spontaneous Current Liabilities = ($50,000 +
$20,000) * 0.40
Increase in Spontaneous Current Liabilities = $28,000
Additional Fund Needed = Increase in Total Assets - Increase in
Spontaneous Current Liabilities - Addition to Retained
Earnings
Additional Fund Needed = $47,000 - $28,000 - $42,000
Additional Fund Needed = -$23,000
Option C is correct.
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