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    Additional funds needed (AFN) to support growth

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    A firm has the following balance sheet:

    Cash $20
    Accounts receivable $20
    Inventory $20
    Common stock $80
    Accounts payable $20
    Notes payable $40
    Long-term debt $80
    Fixed assets $180
    Total assets $240
    Retained earnings $20
    Total liabilities and equity $240

    Sales for the year just ended were $400, and fixed assets were used at 80 percent of capacity, but its current assets were at optimal levels. Sales are expected to grow by 5 percent next year, the profit margin is 5 percent, and the dividend payout ratio is 60 percent. How much additional funds (AFN) will be needed?

    a. $4.6
    b. -$6.4 (surplus)
    c. $2.4
    d. -$4.6 (surplus)
    e. $0.8

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    Solution Preview

    S = $400; S1 = S * 1.05 = $420; SCapacity = $400/0.80 = $500. No new fixed assets are needed to support the sales increase.

    Balance sheet solution:
    Cash $ 21 Accounts ...

    Solution Summary

    The solution includes all the calculations as well as narrative explanations to support the answer.