1. The AFN equation Aa Aa Fuzzy Button Clothing Company has the following end-of

Question

1. The AFN equation Aa Aa Fuzzy Button Clothing Company has the following end-of-year balance sheet: Fuzzy Button Clothing Company Balance Sheet For the Year Ended on December 31 Liabilities Current Liabilities Assets Current Assets: $150,000 Accounts payable Cash and equivalents Accounts receivable Inventories $250,000 150,000 100,000 $500,000 1,000,000 $1,500,000 400,000 350,000 $900,000 Accrued liabilities Notes payable Total Current Assets Total Current Liabilities Net Fixed Assets: Long-Term Bonds Net plant and equipment (cost minus depreciation) $2,100,000 Total Debt Common Equity Common stock 800,000 700,000 $1,500,000 $3,000,000 Retained earnings Total Common Equity Total Liabilities and Equity Total Assets $3,000,000 The firm is currently in the process of forecasting sales, asset requirements, and required funding for the coming year. In the year that just ended, Fuzzy Button Clothing Company generated $500,000 net income on sales of $13,500,000. The firm expects sales to increase by 19% this coming year and also expects to maintain its long-run dividend payout ratio of 40%

Explanation / Answer

1). Increase in Total Assets :-

Asset Turnover Ratio = Sales / Total assets

= $13500000 / $3000000

= 4.5 times

Increase in Sales = $13500000 * 19%

= $2565000

Required Assets to meet sales = $2565000 / 4.5

= $570000

2). Amount Increase in Assets Supplied by the spontoneous liabilities :-

Current Liabilities = $250000 + $150000

= $400000

Increase in Current Liabilities = $400000 * 19%

= $76000

3). Amount Added to Retained Earnings.

Net Income = $500000

Increase in Net Income = $500000*19%

= $95000

Amount Added to Retained Earnings = $95000 - ($95000*40%)

(40% = Dividend Payout Ratio)

= $95000 - $38000

= $57000

4). AFN Equation = Increase in Assets - Increase in Spontoneous Liabilities - Increase in retained earnings

= $570000 - $76000 - $57000

= $437000

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