You have been asked to forecast the additional funds needed (AFN) for Houston, Hargrove, & Worthington (HHW), which is planning its operation for the coming year. The firm is operating at full capacity. Data for use in the forecast are shown below. However, the CEO is concerned about the impact of a change in the payout ratio from the 10% that was used in the past to 50%, which the firm's investment bankers have recommended. Based on the AFN equation, by how much would the AFN for the coming year change if HHW increased the payout from 10% to the new and higher levelσ All dollars are in millions.
$\begin{array}{l}
\begin{array}{lc}
\text { Last year's sales }=S_{0} & \$ 300.0 \text { Last year's accounts payal } \
\text { Sales growth rate }=\mathrm{g} & 40 \% \text { Last year's notes payable } \
\text { Last year's total assets }=\mathrm{A}_{0}{ }^{*} & \$ 500.0 \text { Last year's accruals } \
\text { Last year's profit margin }=\text { PM } & 20.0 \% \text { Initial payout ratio }
\end{array}
\begin{array}{r}
\$ 50.0 \
\$ 15.0 \
\$ 20.0 \
10.0 \%
\end{array}
\end{array}$
A) $31.9
B) $33.6
C) $35.3
D) $37.0
E) $38.9

Question

You have been asked to forecast the additional funds needed (AFN) for Houston, Hargrove, & Worthington (HHW), which is planning its operation for the coming year. The firm is operating at full capacity. Data for use in the forecast are shown below. However, the CEO is concerned about the impact of a change in the payout ratio from the 10% that was used in the past to 50%, which the firm's investment bankers have recommended. Based on the AFN equation, by how much would the AFN for the coming year change if HHW increased the payout from 10% to the new and higher levelσ All dollars are in millions. 
$\begin{array}{l}
\begin{array}{lc}
\text { Last year's sales }=S_{0} & \$ 300.0 \text { Last year's accounts payal } \
\text { Sales growth rate }=\mathrm{g} & 40 \% \text { Last year's notes payable } \
\text { Last year's total assets }=\mathrm{A}_{0}{ }^{*} & \$ 500.0 \text { Last year's accruals } \
\text { Last year's profit margin }=\text { PM } & 20.0 \% \text { Initial payout ratio }
\end{array}
\begin{array}{r}
\$ 50.0 \
\$ 15.0 \
\$ 20.0 \
10.0 \%
\end{array}
\end{array}$
A) $31.9
B) $33.6
C) $35.3
D) $37.0
E) $38.9

Quizplus · Accepted Answer

$\begin{array}{lr} \text { Last year's sales }=S_{0} & \$ 300\ \text { Sales growth rate }=g & 40 \% \ \text { Forecasted sales }=S_{0} \times(1+g) & \$ 420 \ \Delta S=\text { change in sales }=S_{1}-S_{0}=S_{0} \times g & \$ 120 \ \text { Last year's total assets }=A_{0}{ }^{*}=A_{0}{ }^{*} \text { since full capacity } & \$500\ \text { Last year's accounts payable } & \$ 50\ \text { Last year's notes payable. Not spontaneous, }\ \text {so does not enter AFN calculation }&\$ 15 \ \text { Last year's accruals}&\$ 20 \ \text { $ \mathrm{L}_{0}{ }^{*}= $ payables $ + $ accruals}&\$ 70 \ \text {Profit margin $ =M $ }&20 \% \ \text {Initial payout ratio }&10\%\ \text { New pavout ratio }&50\%\ \end{array}$ AFN = (A₀^*/S₀)ΔS - (L₀^*/S₀)ΔS - Profit margin × S1 × (1 - Payout) Old AFN = $200.0 -$28.0 σ $75.6 = $96.4 New AFN = $200.0 - $28.0 - $42.0 = $130.0 Change in AFN = $33.6

You Have Been Asked to Forecast the Additional Funds Needed