Blue Elk Manufacturing reported sales of $775,000 at the end of last year, but t

Question

Blue Elk Manufacturing reported sales of $775,000 at the end of last year, but this year, sales are expected to grow by 8%. Blue Elk Manufacturing expects to maintain its current profit margin of 20% and dividend payout ratio of 30%. The following information was taken from Blue Elk Manufacturing's balance sheet: Based on the AFN equation, the firm's AFN for the current year is A positively signed AFN value represents: A point at which the funds generated within the firm equal the demands for funds to finance the firm's future expected sales requirements A surplus of internally generated funds that can be invested in physical or financial assets or paid out as additional dividends 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, Blue Elk Manufacturing is thinking about raising its dividend payout ratio to satisfy shareholders. Blue Elk Manufacturing could pay out of its earnings to shareholders without needing to raise any external capital. (What can Blue Elk Manufacturing increase its dividend payout ratio to before the AFN becomes positive?)

Explanation / Answer

A surplus of internally generated funds that can be in physical or financila assets or paid out as additional funds.

AFN   (A/S0)S–(L/S0)S–MS1(RR)

A- Assets tied directly to sales

L-spontaneous liabilities that are affected by sales

S0 the previous year's sales

S1 total projected sales for next year

S the change in sales between S0 and S1

MS1 projected net income

RR the retention ratio from net income

0 = (450000/775000)*62000-((70000+60000)/775000)*62000-775000*108%*20%*(1-X)

0 = $36,000-$10,484-$167,400*(1-X)

1-X = 15.24%

Payout ratio = 84.76%

AFN   (A/S0)S–(L/S0)S–MS1(RR) A- Assets tied directly to sales L-spontaneous liabilities that are affected by sales S0 the previous year's sales S1 total projected sales for next year S the change in sales between S0 and S1 MS1 projected net income RR the retention ratio from net income AFN $                        (91,580.00) (450000/775000)*62000-((70000+60000)/775000)*62000-775000*108%*20%*(1-30%)

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