Question

The company Jalil Corp is planning its operations in the coming year and the board of directors asked you to prepare a forecast regarding the Additional Fund Needed. The company operates at full capacity. The data used for the calculation of forecasting funding requirements is below. The Board of Directors plans a change in dividend policy, initially the Payout Ratio of 10% was increased to 50%.

Question

How much is the need for additional funds in the coming year based on the AFN (Additional Fund Needed) approach, if the dividend policy changes from a Payout Ratio of 10% to 50%.

Last year's sales = S0 = IDR 300.
Accounts payable last year was IDR 50.-
Sales growth rate = g = 40%
Notes payable last year was IDR 15.0
Last year's total assets = A0 * = IDR 500.0
Last year's accruals were IDR 20.0
Last year's profit margin = PM = 20.0%
Last year's payout ratio = 10.0%

Make an analysis and discuss the financial conditions above!

Answer 1

The more formal equation for AFN is

AFN = (A*/S0)ΔS – (L*/S0)ΔS – MS1(RR)

• A- Assets tied directly to sales
• L-spontaneous liabilities that are affected by sales
• S0=the previous year’s sales
• S1=total projected sales for next year
• ΔS=the change in sales between S0 and S1
• M=profit margin
• MS1=projected net income
• RR=the retention ratio from net income

Therefore in the given case using the above formula,

AFN = (500/300) x 120 - (85/300) x120 - (84 x 0.5)

Therefore AFN is IDR 124.

Jail Corp will need additional funds of IDR 124. The AFN would be lower if the dividend payout ratio remained the same at 10%.