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*	$115,000	Last year's accruals	$20,000
Last year's profit margin = PM	20.0%	Target payout ratio	25.0%

Select the correct answer.

a. - $24,040

b. - $23,960

c. - $24,000

d. - $24,080

e. - $24,120

Answer 1

Given about Lewis, Lee & Taylor Inc.

Additional fund needed is calculated using equation,

Additional fund needed = required asset increase - spontaneous liability increase - increase in retained earning

Required asset increase = last year's asset*growth rate =115000*0.4 = $46000

Spontaneous liability increase = (accounts payable+accruals)*growth rate = (50000+20000)*0.4 = $28000

Increase in retained earning = Profit margin*Sales in next period*(1-payout ratio) = 0.2*200000*1.4*(1-0.25) = $42000

So, Additional fund needed = 46000 - 28000 - 42000 = -$24000

Option c is correct