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Additional Funds Needed (AFN)

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A firm has the following Balance Sheet:

CA 7,000
FA 3,000

TA 10,000

AP 1,500
Short-Term Loans 2,000
Common Stock 1,500
RE 5,000

Total Claims 10,000

After tax profit margin is 3.0% and the firm pays out 40% of its earnings in dividends. Sales last year were 12,000. Profit Margin and payout ratio will remain constant.

a. Use the AFN equation to estimate the funds needed if sales will grow 25% next year and it is currently operating at 100% capacity.

b. Without doing the calculations, would the funds needed be higher or lower if the firm has been operating at 50% capacity this year?

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Solution Preview

a. For purposes of the Additional Funds Needed formula, we do not consider short-term loans or notes to be spontaneous liabilities (i.e., they do not increase with an increase in sales). Furthermore, if the company is operating at full capacity, all assets will be ...

Solution Summary

This solution illustrates how to compute a company's additional funds needed if it operates at full capacity and discusses how that changes if it operates at partial capacity.

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See Also This Related BrainMass Solution

How to Calculate Additional Funds Needed (AFN)

Calculation of Additional Funds Needed

Baxter Video Production's sales are expected to increase from $5 million in 2007 to $6 million by 2008 or by 20%. Its assets totaled $3 million at the end of 2007. Baxter is at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2007, current liabilities $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accruals. The after-tax profit margin is forecasted to be 5%, and the forecasted payout ratio is 70%. Use the AFN equation to forecast Baxter's additional funds needed for the the upcoming year.

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