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The Additional Funds Needed equation (AFN)

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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

Assets at the End of Last Year

Accounts Payable

Notes Payable


Profit Margin on Sales

Dividend Payout

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

•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.

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Solution Preview

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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Additional Funds Needed: Raising Capital Using the AFN Formula

My company recently reported sales of $100 million, and net income equal to $5 million. My company has $70 million in total assets. Over the next year, I'm forecasting a 20 percent increase in sales. Since my company is at full capacity, its assets must increase in proportion to sales. I estimate that if sales increase 20 percent, spontaneous liabilities will increase by $2 million. If the company=s sales increase, its profit margin will remain at its current level. The dividend payout ratio is 40 percent. Based on the AFN formula, how much additional capital must my company raise in order to support the 20 percent increase in sales?

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