Daniel Sawyer, the CEO of the Sawyer Group, is initiating planning for the compa

Question

Daniel Sawyer, the CEO of the Sawyer Group, is initiating planning for the company's operations next year, and he wants you to forecast the firm's additional funds needed (AFN). 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? Dollars are in millions.

Last year's sales = $350, Last year's accounts payable = $40, Sales growth rate = 3%, Last year's notes payable = $50, Last year's total assets = $500, Last year's accruals = $30, Last year's profit margin = 3%, Target payout ratio = 74%

Explanation / Answer

Where,
Ao = current level of assets
S/So = percentage increase in sales i.e. change in sales divided by current sales
Lo = current level of liabilities
S1 = new level of sales
PM = profit margin
b = retention rate = 1 – payout rate

So putting the values,

Additional funds needed is = 500 * 3% - (40+50)*3%*360.5*3%*(1-74%)

360.5 is sales next year.

So Additional funds needed is $15 - $7.59213 = $7.40787

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