Purchase Solution

# 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

##### 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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