A firm has the following balance sheet: Cash $ 200 Accounts payable $ 200 Accoun
ID: 2701724 • Letter: A
Question
A firm has the following balance sheet:
Cash $ 200 Accounts payable $ 200
Accounts receivable 200 Notes payable 400
Inventory 200 Long-term debt 800
Fixed assets 1,800 Common stock 800
Retained earnings 200
Total assets $2,400 Total liabilities & Equity $2,400
Sales for the year just ended were $6,000, and fixed assets were used at 80 percent of capacity. Current assets and accounts payable vary directly with sales. Sales are expected to grow by 20 percent next year, the expected net profit margin is 5 percent, and the dividend payout ratio is 80 percent.
How much additional funds (AFN) will be needed next year, if any?
Explanation / Answer
Total additional fund needed in next year = Additional Working capital + aadditional fixd asset (if any)
Working capital of present year = cash + account recievable + inventory - accounts payable
= 200 + 200 +200 -200 = $400
Working capital is proprtion to sale
therefor % = 400/6000*100 =6.67%
Next year budgeted sale = 6000*1.20 = $7200
Working capital required in next year = 7200*6.67% = $480
Additional working capital required = $80
presently fixed asset is working at 80% capacity, if more 20% of present capacity is increased still it remain to 96%, so additionally fixed asset is not required in next year
Retained earning of the next year = 7200*5%*20% = $72
Total additional fund needed in next year = $80 + 0 = $80
Total additional external fund needed in next year =80-72 = $8
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