Question

Cold Duck Manufacturing Inc. reported sales of $775,000 at the end of last year, but this year, sales are expected to grow by 9%. Cold Duck expects to maintain its current profit margin of 20% and dividend payout ratio of 30%. The following information was taken from Cold Duck’s balance sheet:

Total assets: $475,000 Accounts payable: $65,000 Notes payable: $40,000 Accrued liabilities: $65,000

Based on the AFN equation, the firm’s AFN for the current year is _______ .

A positively signed AFN value represents:
1. A surplus of internally generated funds that can be invested in physical or financial assets or paid out as additional dividends.
2. A shortage of internally generated funds that must be raised outside the company to finance the company’s forecasted future growth.
3. A point at which the funds generated within the firm equal the demands for funds to finance the firm’s future expected sales requirements.

Because of its excess funds, Cold Duck Manufacturing Inc. is thinking about raising its dividend payout ratio to satisfy shareholders. Cold Duck could pay out ___________ of its earnings to shareholders without needing to raise any external capital.(Hint: What can Cold Duck increase its dividend payout ratio to before the AFN becomes positive?)

Answer 1