You are the owner of a small business which has the following balance sheet: Fixed and current assets are fully utilized,and the sales/assets and sales/spontaneous liabilities ratios will remain constant.Next year you expect sales to increase by 50 percent.You also expect to retain $2,000 of next year's earnings within the firm.What is next year's additional external funding requirement,i.e.,what is your firm's AFN?

Question

You are the owner of a small business which has the following balance sheet:  Fixed and current assets are fully utilized,and the sales/assets and sales/spontaneous liabilities ratios will remain constant.Next year you expect sales to increase by 50 percent.You also expect to retain $2,000 of next year's earnings within the firm.What is next year's additional external funding requirement,i.e.,what is your firm's AFN?

Quizplus · Accepted Answer

To calculate the additional external funding required, we need to use the formula for AFN:

AFN = (A*/S0)ΔS - (L*/S0)ΔS - MS1

Where: 
A* = Total assets needed to support current and projected sales 
S0 = Current level of sales 
ΔS = Increase in sales 
L* = Total spontaneous liabilities needed to support current and projected sales 
MS1 = Additional funds generated from internal sources

Plugging in the values from the balance sheet and the given information, we get:

A* = $12,000 + (50% * $12,000) = $18,000 
L* = $6,000 + (50% * $6,000) = $9,000 
MS1 = $2,000

AFN = ($18,000/$12,000) * (50% * $12,000) - ($9,000/$12,000) * (50% * $12,000) - $2,000

AFN = $4,500

Therefore, the additional external funding requirement for next year is $4,500. The correct answer is C.

You Are the Owner of a Small Business Which Has