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    Additional Financing Required

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    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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    https://brainmass.com/business/accounting/additional-financing-required-309188

    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

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