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The Additional Funds Needed equation (AFN)

Additional External Financing

You have been running your small business, Craft's Boat Shop, for several years now and have been very successful. You have come to the point where you expect sales to increase next year and want to be sure that you have enough assets available to support your sales. You also need to have the financing available to acquire those assets, if needed.

Accordingly, you have gathered the following data:

Craft's Boat Shop

Sales Last Year
$1,000,000

Assets at the End of Last Year
750,000

Accounts Payable
60,000

Notes Payable
60,000

Accruals
30,000

Profit Margin on Sales
5%

Dividend Payout
50%

Note: All figures are as of the end of last year

Required:
•If you need $0.80 in assets for every $1.00 in sales, by how much can sales increase without obtaining additional outside financing? HINT: Use the AFN formula.

Solution Preview

Hello,
Thank you for using BM. Here is my suggested solution:
The Additional Funds Needed (AFN) is the required additional assets - Increase in spontaneous liabilities - Increase in retained earnings.
In our case, we need this AFN to equal zero (the question is: by how much can sales increase without obtaining additional outside financing? which means ...

Solution Summary

The Additional Funds Needed equation (AFN) is used to calculate sales increase without obtaining additional outside financing.

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