Question

You have been asked to forecast the additional funds needed (AFN) for next year for Hurley, Hoblit, & Davis (HHD), which is planning its operation for the coming year. The firm is operating at full capacity. The payout ratio for HHD is 10%. Based on this information, calculate the additional funds needed for the coming year given the following information:

Last year's sales = $350 Million
Sales growth rate = 25%
Last year's total assets = $550 Million
Last year's profit margin = 15%
Last year's accounts payable = $50 Million
Last year's notes payable = $15 Million
Last year's accruals = $20 Million
Payout ratio = 15%

A. $28.72 Million

B. $124.54 Million

C. $64.22 Million

D. $92.58

Answer 1

AFN = (A*/S0)?S – (L*/S0) ?S – M(S1)(RR)
A*	$          550	All Assets	$ Dollars
S0	$          350	Sales 0	$ Dollars
?S	$            88	S1 - S0	$ Dollars
L*	$            70	AP + Accurals	$ Dollars
M	15.0%	Profit Margin	%
S1	$          438	Sales 1	$ Dollars
RR	85.0%	Retention Ratio	%
Required	$          138
Spontaneous	$            18
Retained	$            56
AFN	$            64.22

C is correct.