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Additional Financing Required

The 2007 balance sheet for American Pulp and Paper is shown below (in millions of dollars):

Cash $3.0
Accounts Receivable 3.0
Inventory 5.0
Current Assets $11.0

Fixed Assets $3.0
Total Assets $14.0

Accounts Payable $2.0
Notes Payable 1.5
Current Liabilities $3.5
Long term Debt $3.0
Common Equity 7.5
Total Liabilities
and Equity $14.0

In 2007, sales were $60 million. In 2008, management believes that sales will increase by 20 percent to a total of $72 million. The profit margin is expected to be 5 percent, and the dividend payout ratio is targeted at 40 percent. No excess capacity exists. What is the additional financing requirement (in million) for 2008 using the formula method?

Solution Preview

The basic formula for Additional Funds Needed is
AFN = ((A*/S0)*(S1-S0))- ((L*/S0)*(S1-S0)) - MS1(RR)
Where:
A* = Assets tied directly to sales and will increase
L* = Spontaneous liabilities that will be affected by sales.
S0 = Sales during the last year
S1 = ...

Solution Summary

The 2007 balance sheet for American Pulp and Paper is shown below (in millions of dollars):

Cash $3.0
Accounts Receivable 3.0
Inventory 5.0
Current Assets $11.0

Fixed Assets $3.0
Total Assets $14.0

Accounts Payable $2.0
Notes Payable 1.5
Current Liabilities $3.5
Long term Debt $3.0
Common Equity 7.5
Total Liabilities
and Equity $14.0

In 2007, sales were $60 million. In 2008, management believes that sales will increase by 20 percent to a total of $72 million. The profit margin is expected to be 5 percent, and the dividend payout ratio is targeted at 40 percent. No excess capacity exists. What is the additional financing requirement (in million) for 2008 using the formula method?

$2.19