Green Moose Industries reported sales of $743,000 at the end of last year; but t
ID: 2620488 • Letter: G
Question
Green Moose Industries reported sales of $743,000 at the end of last year; but this year, sales are expected to grow by 8%. Green Mooseexpects to maintain its current profit margin of 21% and dividend payout ratio of 25%. The firm's total assets equaled $475,000 and were operated at full capacity. Green Moose's balance sheet shows the following current liabilities: accounts payable of $70,000, notes payable of $45,000, and accrued liabilities of $70,000. Based on the AFN (Additional Funds Needed) equation, what is the firm's AFN for the coming year? O -$119,501 0 -$99,584 O -$124,480 O -$114,522 A negatively-signed AFN value represents: O A shortage of internally generated funds that must be raised outside the company to finance the company's forecasted future growth O A surplus of internally generated funds that can be invested in physical or financial assets or paid out as additional dividends O A point at which the funds generated within the firm equal the demands for funds to finance the firm's future expected sales requirements Because of its excess funds, Green Moose is thinking about raising its dividend payout ratio to satisfy shareholders. What percentage of its earnings can Green Moose pay to shareholders without needing to raise any extergal capital? (Hint: What can Green Moose increase its dividend payout ratio to before the AFN becomes positive?) o 84.1% 58.9% 67.3%Explanation / Answer
1. Additional Funds Needed=Ao×?S/So?Lo×?S/So?S1×PM×b
Where,
Ao = current level of assets
Lo = current level of liabilities
?S/So = percentage increase in sales i.e. change in sales divided by current sales
S1 = new level of sales
PM = profit margin
b = retention rate = 1 – payout rate
Substitute figures from the question
Ao = 475000
Lo = 70000+70000=140000
?S/So = 8% (Given)
S1 = 743000x108%=802440
PM = 21%
b = retention rate = 1 – .25=.75
Hence
AFN=475000x.08-140000x.08-802440x.21*.75= 99584.3
2. Negatively sighned AFN represents
A surplus of internally generated funds that can be invested in physical or financial assets or paid as additional dividents
3. 84.1%
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