A firm has the following balance sheet: Cash $ 200 Accounts payable $ 200 Accoun

Question

A firm has the following balance sheet:

            Cash                          $  200     Accounts payable               $ 200

            Accounts receivable      200     Notes payable                       400

            Inventory                       200      Long-term debt                    800

            Fixed assets                1,800     Common stock                      800

                                                             Retained earnings                  200

            Total assets              $2,400     Total liabilities & Equity  $2,400

Sales for the year just ended were $6,000, and fixed assets were used at 80 percent of capacity. Current assets and accounts payable vary directly with sales.  Sales are expected to grow by 20 percent next year, the expected net profit margin is 5 percent, and the dividend payout ratio is 80 percent.

How much additional funds (AFN) will be needed next year, if any?

Explanation / Answer

Expected Sales = 6000 + 20% *6000 = $7200

Fixed asset were used at 80% of Capacity, if production of 20% growth then alos it will reach to 96% of capacity, hence there is no need of fund for fixed asset

Addititonal fund Required for Working Capital

Expected Current Asset Next year = (200+200+200)*120% = $720

Expected Accounts payable = 200*120% = $240

Expected Working Capital = $480

Present Working Capital = $400

Additional Fund needed (AFN) = $80

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