Fill This Form To Receive Instant Help
Fill This Form To Receive Instant Help
Homework answers / question archive / You have been asked to forecast the additional funds needed (AFN) for Houston, Hargrove, & Worthington (HHW), which is planning its operation for the coming year
You have been asked to forecast the additional funds needed (AFN) for Houston, Hargrove, & Worthington (HHW), which is planning its operation for the coming year. The firm is operating at full capacity. Data for use in the forecast are shown below. However, the CEO is concerned about the impact of a change in the payout ratio from the 10% that was used in the past to 45%, which the firm's investment bankers have recommended. Based on the AFN equation, by how much would the AFN for the coming year change if HHW increased the payout from 10% to the new and higher level? All dollars are in millions.
| Last year's sales = S0 | $300.0 | Last year's accounts payable | $50.0 |
| Sales growth rate = g | 40% | Last year's notes payable | $15.0 |
| Last year's total assets = A0* | $500 | Last year's accruals | $20.0 |
| Last year's profit margin = PM | 20.0% | Initial payout ratio | 10.0% |
Answer : Calculation of Required Additional Funds at 10% payout :
Required Additional funds = [ (Total Asset / Current Sales) *Change in sales ] - [ (Spontaneous Liability / Current sales) *Change in sales ] - [New Sales * Profit margin ratio * (1 - Dividend payout ratio)]
Change in Sales = 300 * 40% = 120
Spontaneous Liability include Accounts payable and accruals
Required new funds = [ (500 / 300) * 120 ] - {[70 / 300 ] * 120 ] - [ 420 * 0.20 * (1 - 0.10)]
= 200 - 28 - 75.6
= $96.40
Calculation of Required Additional Funds at 45% payout :
Required Additional funds = [ (Total Asset / Current Sales) *Change in sales ] - [ (Spontaneous Liability / Current sales) *Change in sales ] - [New Sales * Profit margin ratio * (1 - Dividend payout ratio)]
Change in Sales = 300 * 40% = 120
Spontaneous Liability include Accounts payable and accruals
Required new funds = [ (500 / 300) * 120 ] - {[70 / 300 ] * 120 ] - [ 420 * 0.20 * (1 - 0.45)]
= 200 - 28 - 46.2
= $125.8
Increase in AFN = 125.8 - 96.40 = 29.40
