Question

Your firm recorded sales for the most recent year of $10 million generated from an asset base of $7 million, producing a $500,000 net income. Sales are projected to grow at 20%, causing spontaneous liabilities to increase by $200,000. In the most recent year, $200,000 was paid out as dividends, and the current payout ratio will continue in the upcoming years. What is your firm’s AFN?

Hint:

g = growth rate of sales = ??

S0 = current sales = ??

S1 = new sales = S0 * (1+g) = ??

A0 = current asset = ??

NI0 = current profit = ??

NI0 / S0 = current profit margin = ??

RR0 = Retention ratio = 1 - Dividend / Net profit = ??

Change of Assets = A0 * g= ??

Change of Liability = ??

Addition to Retained Earnings = S1 * (NI0 / S0) * RR0 = ??

AFN = Change of Assets - Change of Liabilities - Addition to Retained Earnings = ??

Answer 1

g = growth rate of sales =20% =0.2 (Given)

S0 = current sales = 10,000,000 = 10 Million

S1 = new sales = S0 * (1+g) = 10,000,000*(1+0.2) = 12,000,000 = 12 Million

A0 = current asset = 7,000,000 = 7 Million

NI0 = current profit = 500,000

NI0 / S0 = current profit margin = 500,000/10,000,000 = 0.05=5%

RR0 = Retention ratio = 1 - Dividend / Net profit = 1 - 200,000/500,000 = 0.6 = 60%

Change of Assets = A0 * g= 7,000,000* 0.2 =1,400,000

Change of Liability = 200,000

Addition to Retained Earnings = S1 * (NI0 / S0) * RR0 = 12,000,000*(500,000/10,000,000)*0.6 = 360,000

AFN = Change of Assets - Change of Liabilities - Addition to Retained Earnings = 1,400,000 -200,000 -360,000 = 840,000