Question

A Company's sales are expected to increase by 15% from $6 million in 2015 to $6.9 million in 2016. Its assets totaled $4.2 million at the end of 2015. Rusty Metal is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2015, current liabilities were $1.35 million, consisting of $450,000 of accounts payable, $550,000 of notes payable and $350,000 of accruals. The after-tax profit margin is forecasted to be 7%, and the forecasted payout ratio is 41%. Using the AFN equation, what is the forecast for A Company's additional funds needed (AFN) for the coming year.

Answer 1

Additional Funds Needed = (A0/S0*(S1-S0)) - (L0/S0*(S1-S0)) - (PM*S1*b)

where

Ao - Assets (at time 0) which vary directly with Sales = 4.2 million

Lo - Liabilities (at time 0) which vary directly with Sales=450000+350000 = 800000

So - Current Sales = 6 million

S1 - Projected Sales = 6 million*1.15 = 6.9 million

b - Retention ratio = 100- payout ratio = 100-41 = 59%

PM - Profit Margin = 7%

Additional Funds Needed = (4.2 million/6 million*(6.9 million-6 million)) - (800000/6 million*(6.9 million-6 million)) - (.07*6.9 million*.59)

= 630000 - 120000-284970

= 225030