Homework Answers
Additional Funds Needed [AFN] for the coming year
Expected Next Year Sales = $6,000,000
After Tax profit Margin
After Tax profit Margin = Expected Next Year Sales x Profit Margin
= $6,000,000 x 5.00%
= $300,000
Additions to Retained Earnings
Additions to Retained Earnings = After Tax profit Margin x Retention ratio
= $300,000 x 25%
= $75,000
Increase in Total Assets
Increase in Total Assets = Total Assets x Percentage of Increase in sales
= $5,000,000 x 20%
= $1,000,000
Increase in Spontaneous liabilities
Increase in Spontaneous liabilities = [Accounts Payable + Accruals] x Percentage of Increase in sales
= [$250,000 + $250,000] x 20%
= $500,000 x 20%
= $100,000
Additional Funds Needed [AFN]
Therefore, the Additional Funds Needed [AFN] = Increase in Total Assets – Increase in in Spontaneous liabilities – Additions to retained earnings
= $1,000,000 - $100,000 - $75,000
= $825,000
“Hence, the additional funds needed for the coming year will be $825,000”
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