Question

Daniel Sawyer, the CEO of the Sawyer Group, is initiating planning for the company's operations next year, and he wants you to forecast the firm's additional funds needed (AFN). 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? Dollars are in millions.

Last year's sales = S0	$350	Last year's accounts payable	$40
Sales growth rate = g	30%	Last year's notes payable	$50
Last year's total assets = A0*	$500	Last year's accruals	$30
Last year's profit margin = PM	10%	Target payout ratio	60%

Answers:	a. $125.9
	b. $102.8
	c. $119.9
	d. $110.80
	e. $113.9

Answer 1

Additional Funds Needed [AFN] for the coming year

• Last Year Sales = $350
• Expected Next Year Sales = $455 [$350 x 130%]
• After Tax profit Margin = $45.50 [$455 x 10%]
• Dividend Pay-out = $27.30 [$45.50 x 60%]
• Therefore, Additions to Retained Earnings will be $18.20 [$45.50 - $27.30]
• Increase in Total Assets = $150 [$500 x 130%]
• Increase in Current Liabilities = $21 [($40 + $30) x 30%]

Additional Funds Needed [AFN] for the coming year

Additional Funds Needed [AFN] = Increase in Total Assets – Increase in Current Liabilities – Additions to retained earnings

= $150 - $21 - $18.20

= $110.80

“Therefore, the Additional Funds Needed [AFN] for the coming year would be (d). $110.80”