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My company recently reported sales of $100 million, and net income equal to $5 million
My company recently reported sales of $100 million, and net income equal to $5 million. My company has $70 million in total assets. Over the next year, I'm forecasting a 20 percent increase in sales. Since my company is at full capacity, its assets must increase in proportion to sales. I estimate that if sales increase 20 percent, spontaneous liabilities will increase by $2 million. If the company=s sales increase, its profit margin will remain at its current level. The dividend payout ratio is 40 percent. Based on the AFN formula, how much additional capital must my company raise in order to support the 20 percent increase in sales?
Expert Solution
AFN = (A*/S0)DS - (L*/S0)DS - MS1(1 - d)
or we can write as
AFN = Increase in Assets - Increase in spontaneous Liabilities - Retained Earnings.
The assets will increase in the same proportion as sales. The increase in assets is 70X20%=14 million.
Increase in spontaneous liabilities = 2 million.
Current profit Margin = 5/100=5%
The increased sales are 120 million. The profit margin is 120X5%=6 million.
Retained Earnings = 6X(1-0.4)=3.6 million
AFN = 14-2-3.6=8.4 million.
Additional capital required is 8.4 million.
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