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
E) $1,400,000

Question

Quizplus · Accepted Answer

The Additional Funds Needed (AFN) is calculated using the formula: AFN = (A*/S0)ΔS - (L*/S0)ΔS - M(S1)(RR). Here, A*/S0 = 7/10, L*/S0 = 0.2/10, ΔS = 2, M = 0.8, S1 = 12, RR = 0.6. Plugging in the values, AFN = (0.7)(2) - (0.02)(2) - (0.8)(12)(0.6) = 1.4 - 0.04 - 5.76 = 0.84 million or $840,000.

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