Question

5. 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? 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 and  the action or project which is being undertaken will generate extra income for the company, which can be invested elsewhere.