Using the AFN formula approach, calculate the total assets of Harmon Photo Compa

Question

Using the AFN formula approach, calculate the total assets of Harmon Photo Company given the following information: Sales this year = $3,000; sales increase projected for next year = 20%; net income this year = $250; dividend payout ratio = 40%; projected excess funds available next year = $100; accounts payable = $600; notes payable = $100; and accrued wages and taxes = $200. Except for the accounts noted, there were no other current liabilities. Assume that the firm's profit margin remains constant and that the company is operating at full capacity. What is the total assets of Harmon Photo Company?

Explanation / Answer

Sales this year = $3,000

Sales increase projected for next year = 20%

Net Income this year = $250

Dividend payout ratio = 40%

Projected excess funds available next year = $100

Accounts Payable = $600

Notes Payable = $100

Accrued wages and taxes = $200

AFN = Projected increase in Assets – Spontaneous increase in liabilities – Any increase in Retained Earnings

AFN = (A*/S0)S - (L*/S0)S - MS1(RR)

A* = Assets ties directly to sales and will increase

L* = Spontaneous liabilities that will be affected by sales

S0 = Sales during the last year

S1 = Total sales projected for next year (the new level of sales)

S = The increase in sales between S0 and S1

M = Profit margin, or the profit per $1 of sales

MS1 = Projected Net Income

RR = The retention ratio from Net Income and is also calculated as (1-patout ratio)

S0 = $3,000

S1 = [$3,000 * 20%] = [$3,000 + $600] = $3,600

S = $600

M = Profit Margin, or the profit per $1 of sales

Profit margin = [Net Income / Sales]

Profit Margin = [$250 / $3,000]

Profit Margin = 8.33%

M = 8.33%

RR = The rentention ratio from Net Income and is also calculated as (1-Payout ratio)

RR = (1-0.40)

RR = 0.60

L* = Spontaneous liabilities that will be affected by sales

L* = [$100 + $600 + $100 + $200]

L* = $1,000

AFN = (A*/S0)S - (L*/S0)S - MS1(RR)

$100 = [(A* / $3000) $600 ] – [($1,000 / $600)$600] – 8.33% * $3,600 (0.60)

$100 = [(A* / $3000) $600 ] - $1,000 - $179.928

$100 = [(A* / $3000) $600 ] - $1,179.93

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