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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 Summary

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

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 ...

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