3. More on the AFN (Additional Funds Needed) equation Aa Aa Cold Duck Manufactur

Question

3. More on the AFN (Additional Funds Needed) equation Aa Aa Cold Duck Manufacturing Inc. reported sales of $820,000 at the end of last year; but this year, sales are expected to grow by 8%. Cold Duckexpects to maintain its current profit margin of 23% and dividend payout ratio of 15%. The firm's total assets equaled $500,000 and were operated at full capacity. Cold Duck's balance sheet shows the following current liabilities: accounts payable of $60,000, notes payable of $40,000, and accrued liabilities of $65,000. Based on the AFN (Additional Funds Needed) equation, what is the firm's AFN for the coming year? O -$171,762 O -$143,135 O -$178,919 O-$150,292 A negatively-signed AFN value represents: O A surplus of internally generated funds that can be invested in physical or financial assets or paid out as O A shortage of internally generated funds that must be raised outside the company to finance the company's O A point at which the funds generated within the firm equal the demands for funds to finance the firm's future additional dividends forecasted future growth expected sales requirements Because of its excess funds, Cold Duck is thinking about raising its dividend payout ratio to satisfy shareholders What percentage of its earnings can Cold Duck pay to shareholders without needing to raise any external capital? (Hint: What can Cold Duck increase its dividend payout ratio to before the AFN becomes positive?) O 81.0% O 64.0% 725% O 85.3%

Explanation / Answer

s0=820000
A0=500000
CL=accpayable+accrued liability
=60000+65000=125000
M(profit margin)=23%
payout ratio=15%

Actual funds needed=((A0/S0)*chnage in sales)--((L0/S0)*chnage in sales)-((M*Next year sales)*(1-payout))

=(500000*8%)-(125000*8%)-(820000*(1+8%)*23%*(1-15%))
=-143,135
It is option A

Here we have to make the AFN equation to zero and find the payout ratio
0=(500000*8%)-(125000*8%)-(820000*(1+8%)*23%*(1-payout))
Payout=85.3%

It is option D

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