Your firm recorded sales for the most recent year of $10 million generated from an asset base of $7 million, producing a $500,000 net income. Sales are projected to grow at 20%, causing spontaneous liabilities to increase by $200,000. In the most recent year, $200,000 was paid out as dividends, and the current payout ratio will continue in the upcoming years. What is your firm's AFN?
A)$200,000
B)$600,000
C)$840,000
D)$960,000

Question

Quizplus · Accepted Answer

To calculate AFN, we need to first calculate the increase in assets due to the projected increase in sales. To do this, we use the equation:
Increase in assets = (Sales increase * Asset/Sales ratio)

The asset/sales ratio is calculated as Asset/Sales = $7 million / $10 million = 0.7.

The increase in sales is given as 20%, so the increase in assets is: 
$10 million x 0.2 x 0.7 = $1.4 million

Next, we need to calculate the increase in spontaneous liabilities, which is given as $200,000.

We also know that the firm paid out $200,000 as dividends in the most recent year, and the payout ratio will continue in the upcoming years. So, we can calculate the amount of additional funds needed as:
Additional funds needed = Increase in assets - Increase in spontaneous liabilities - Dividends 
Additional funds needed = $1.4 million - $200,000 - $200,000 = $1 million

Therefore, the firm's AFN is $1 million, or choice C.

Your Firm Recorded Sales for the Most Recent Year of $10