AFF 210 Lecture Notes - Lecture 3: Profit Margin, Income Statement, Retained Earnings

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rubyrat622

25 Mar 2016

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Additional funds needed (afn) = required asset increase spontaneous. Afn = (a*/s0) x change in sales (l*/s0) x change in sales ms1(rr) A* - assets that increase if sales are to increase (when firm is operating at full capacity a* = total assets) A*/s0 percentage of required assets to sales; shows required dollar increase in assets per increase in sales. L* - liabilities that increase spontaneously < total liabilities (a/p, accruals, not bank loans & bonds) L*/s0 liabilities that increase spontaneously as percentage of sales. S1 total sales projected for next year. M profit margin, profit per of sales. Rr retention ratio ( 1 payout ratio) Self-supporting growth rate the maximum growth rate the firm could achieve if it had no access to external capital can be found at the value of g g = m(rr)(s0) / a* - l* - m(rr)(s0)

Related Questions

The Booth Company's sales are forecasted to double from $1,000 in 2012 to $2,000 in 2013. Here is the December 31, 2012, balance sheet:
Cash $ 100 Accounts payable $ 50
Accounts receivable 200 Notes payable 150
Inventories 200 Accruals 50
Net fixed assets 500 Long-term debt 400
Common stock 100
Retained earnings 250
Total assets $1000 Total liabilities and equity $1000

Booth's fixed assets were used to only 50% of capacity during 2012, but its current assets were at their proper levels in relation to sales. Spontaneous liabilities and all assets except fixed assets must increase at the same rate as sales, and fixed assets would also have to increase at the same rate if the current excess capacity did not exist. Booth's after-tax profit margin is forecasted to be 8% and its payout ratio to be 50%. What is Booth's additional funds needed (AFN) for the coming year?

Broussardâs Skateboardâs sales are expected to increase by 15% from $8 million in 2013 to $9.2 million in 2014. Its assets totaled $5 million at the end of 2013. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2013, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, %500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 6%, and the forecasted payout ratio is 40%. Use the AFN equation to forecast Broussardâs additional funds needed for the coming year. What would be the additional funds needed if the companyâs year-end 2013 assets had been $7 million? Assume that all other numbers, including sales, and the company is operating at full capacity. Why is this AFN different from the one you found earlier? Is the companyâs âcapital intensityâ ratio the same or different?

The Booth Companyâs sales are forecasted to double from $1,000 in 2013 to $2,000 in
2014. Here is the December 31, 2013, balance sheet:

Cash $ 100 Accounts payable $ 50
Accounts receivable 200 Notes payable 150
Inventories 200 Accruals 50
Net fixed assets 500 Long-term debt 400
Common stock 100
Retained earnings 250
Total assets $1,000 Total liabilities and equity $1,000

Boothâs fixed assets were used to only 50% of capacity during 2013, but its current assets were
at their proper levels in relation to sales. All assets except fixed assets must increase at the
same rate as sales, and fixed assets would also have to increase at the same rate if the current
excess capacity did not exist. Boothâs after-tax profit margin is forecasted to be 5% and its
payout ratio to be 60%. What is Boothâs additional funds needed (AFN) for the coming year?

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AFF 210 Lecture Notes - Lecture 3: Profit Margin, Income Statement, Retained Earnings

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