Question

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*	$155,000	Last year's accruals	$20,000
Last year's profit margin = PM	20.0%	Target payout ratio	25.0%

Select the correct answer.

a. - $8,020

b. - $8,010

c. - $7,990

d. - $7,980

e. - $8,000

Answer 1

CORRECT ANSWER IS E - $8,000

Calculate Increase In Liabilities (Next Year)

Liabilities(Current Year) = 50,000 + 20,000 =70,000

Increase In Liabilities( NEXT YEAR) = 70,000 X 40% = $28,000

Calculate Increase In Total ASSETS (Next Year)

Total Assets(Current Year) = $155,000

Increase In Assets( NEXT YEAR) = 155,000 x 40%= $62,000

Calculate Increase In Sales (Next Year)

Increase In Sales( NEXT YEAR) = 200,000 x 40%= $80,000

Total Sales Next Year = $280,000.

Calculate Profit on Next Year Sales

Profit = $280,000 x 20% = $56,000

Calculate Retained Earning Next Year

Retained Earning = Profit - Dividend Paid

= $56,000 - 25% of $56,000

=$42,000

Calculation of Additional Funds Needed (AFN) for Next Year

AFN= Increase In Assets - Increase In Liabilities -  Increase in Retained Earning

= 62,000 - 28,000 - 42,000

=-$8,000