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Green Moose Industries reported sales of $743,000 at the end of last year; but this year, sales are expected to grow by 8%
Green Moose Industries reported sales of $743,000 at the end of last year; but this year, sales are expected to grow by 8%. Green Mooseexpects to maintain its current profit margin of 21% and dividend payout ratio of 15%. The firm's total assets equaled $450,000 and were operated at full capacity. Green Moose's balance sheet shows the following current liabilities: accounts payable of $70,000, notes payable of $40,000, and accrued liabilities of $60,000.
QUESTION: Based on the AFN (Additional Funds Needed) equation, what is the firm's AFN for the coming year?
A. -$141,163
B. -$111,754
C. -$117,636
D. -$152,927
QUESTION: A negatively-signed AFN value represents:
A. a point at which the funds generated within the firm equal the demands for funds to finance the firm's future expected sales requirements.
B. a surplus of internally generated funds that can be invested in physical or financial assets or paid out as additional dividends.
C. a shortage of internally generated funds that must be raised outside the company to finance the company's forecasted future growth.
Because of its excess funds, Green Moose is thinking about raising its dividend payout ratio to satisfy shareholders.
QUESTION: What percentage of its earnings can Green Moose pay to shareholders without needing to raise any external capital? (Hint: What can Green Moose increase its dividend payout ratio to before the AFN becomes positive?)
A. 72.1%
B. 59.4%
C. 84.8%
D. 63.6%
Expert Solution
Computation of the AFN (additional fund needed) for the coming year:-
S0 = $743,000
S1 = S0*(1+Grwoth rate)
= $743,000*(1+8%)
= $802,440
ΔS = S1 - S0
= $802,440 - $743,000
= $59,440
A0 = $450,000
L0 = Accounts payable + Accruals
= $70,000 + $60,000
= $130,000
AFN = ((A0/S0)*ΔS) - ((L0/S0)*ΔS) - (Profit margin * S1 * (1 - Dividend payout ratio))
= ((450000/743000)*59440) - ((130000/743000)*59440) - (21% * 802440 * (1 - 15%))
= $36,000 - $10,400 - $143,235.54
= -$117,635.54 Or -$117,636
Computation of the dividend payout ratio:-
AFN = ((A0/S0)*ΔS) - ((L0/S0)*ΔS) - (Profit margin * S1 * (1 - Dividend payout ratio))
0 = ((450000/743000)*59440) - ((130000/743000)*59440) - (21% * 802440 * (1 - Dividend payout ratio))
0 = $36,000 - $10,400 - ($168,512.40 * (1 - Dividend payout ratio))
$168,512.40 * (1 - Dividend payout ratio) = $25,600
(1 - Dividend payout ratio) = $25,600 / $168,512.40
Dividend payout ratio = 1 - 15.2%
= 84.8%
Correct option is C). -$117,636
Correct option is B). a surplus of internally generated fund that can be invested in physical or financial assets or paid out as additional dividends.
Correct option is C). 84.8%
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