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 AFN (Additional Funds Needed) we will first calculate the projected total assets for next year:

Projected Total Assets = Total Assets / Sales Ratio * Projected Sales = $90,000 / 0.5 * 1.5 = $270,000

Next, we need to calculate the projected spontaneous liabilities:

Projected Spontaneous Liabilities = Spontaneous Liabilities / Sales Ratio * Projected Sales = $45,000 / 0.5 * 1.5 = $135,000

Then, we can calculate the projected total external financing needed:

Projected Total External Financing Needed = Projected Total Assets - Projected Spontaneous Liabilities - Retained Earnings = $270,000 - $135,000 - $2,000 = $133,000

Therefore, the answer is C) $4,500, as $4,500 of external funding is needed to finance the projected increase in sales and retained earnings.

You Are the Owner of a Small Business Which Has