Question

16. Chua Chang & Wu Inc. is planning its operations for next year, and the CEO wants you to forecast the firm's additional funds needed (AFN). Data for use in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year? $200,000 Last year's sales = So Sales growth rate =g Last year's total assets = Ao* Last year's profit margin =PM 40% $127,500 20.0% Last year's accounts $50,000 payable Last year's notes payable $15,000 Last year's accruals $20,000 Target payout ratio 25.0%

Answer 1

AFN = Increased in Assets - Increased in Liabilities - Addition to Retained Earnings

= [Current Level of Spontaneous Assets * Sales Growth] - [Current Level of Spontaneous Liabilities * Sales Growth] - [New Level of Sales * Profit Margin * Retention Ratio]

= [$127,500 * 0.40] - [($50,000 + $20,000) * 0.40] - [{$200,000 * (1 + 0.40)} * 0.20 * (1 - 0.25)]

= $51,000 - $28,000 - $42,000 = -$19,000