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In your internship with Lewis, Lee, & Taylor Inc
In your internship with Lewis, Lee, & Taylor 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 | Last year's accounts payable | $50,000 |
| Sales growth rate = g | 40% | Last year's notes payable | $15,000 |
| Last year's total assets = A0* | $120,000 | Last year's accruals | $20,000 |
| Last year's profit margin = PM | 20.0% | Target payout ratio | 25.0% |
Expert Solution
Formula for Additional funds Needed:-
AFN = (Last year's Total Assets/Last Year's Sales)*Change in sales - (Last Year's Spontaneous Liab/Last Year's Sales)*Change in sales - [Forecasted sales*After-Tax Profit Margin*(1-Payout Ratio]
where, Last Year's Sales = $200,000
Forecasted sales = Last Year's Sales*(1+ Sales Growth Rate) = $200,000*(1+0.40) = $280,000
Change in Sales = $280,000 - $200,000 = $80,000
Last year's Total Assets = $120,000
Spontaneous Liab = Accounts Payable + Accured Liabilities (notes Payable are not part of Spontaneous Liab)
= $50,000 + $20,000 = $70,000
After-Tax Profit Margin = 20%
Payout Ratio = 25%
AFN = ($120,000/$200,000)*$80,000 - ($70,000/$200,000)*$80,000 - [$280,000*20%*(1-0.25)]
AFN = $48,000 - $28,000 - $42,000
AFN = -$22,000
So, the AFN for the coming year is -$22,000
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