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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?

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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