Question

Mayor company sales are expected to increase by 20% from $5 million in 2018 to $6 million in 2019. Its assets totaled $7 million at the end of 2018. Mayor is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2018, current liabilities were $1.2 million, consisting of $500,000 of accounts payable, $300,000 of notes payable, and $400,000 of accruals. The after-tax profit margin is forecasted to be 5%, and the forecasted payout ratio is 60%.

a. Use the AFN equation to forecast Mayor’s additional funds needed for the coming year?

Answer 1

Formula for Additional funds Needed(AFN):-

AFN = (Assets/Sales)*Change in sales - (Spontaneous Liab/Sales)*Change in sales - [Forecasted Sales*(After-Tax Net Profit Margin)*(1- Payout Ratio)]

where, Change in Sales = $6M - $5M = $ 1 million

Spontaneous Liab = Accounts Payable + Accured Liabilities (notes Payable are not part of Spontaneous Liab)

= $ 500,000 + $ 400,000 = $900,000

Assets = $7 million

Sales = $5 million

Forecasted Sales = $6 million

After-Tax Net Profit Margin = 5%

Payout Ratio = 60%

AFN= [(7M/5M)*1M] - [(900,000/5,000,000)*1000,000] - [6,000,000*5%*(1-0.60)]

AFN = 1400,000 - 180,000 - 120,000

AFN =$1100,000

So, Mayor’s additional funds needed for the coming year is $1100,000

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