Question

1. In your internship with LLT 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? (5 points)
   

Last year's sales = S0	$200,000
Sales growth rate = g	40%
Last year's total assets = A0*	$135,000
Last year's profit margin = PM	20.0%
Last year's accounts payable	$50,000
Last year's notes payable	$15,000
Last year's accruals	$20,000
Target payout ratio	25.0%

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 = 135000

Lo - Liabilities (at time 0) which vary directly with Sales= 50000+20000 = 70000

So - Current Sales = 200000

S1 - Projected Sales = 200000*1.4 = 280000

b - Retention ratio = 100-25 = 75%

PM - Profit Margin = 20%

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

=(135000/200000*(280000-200000)) - (70000/200000*(280000-200000)) - (.2*280000*.75)

= 54000-28000-42000

= -16000

-ve AFN means, it does not need any additional fund.