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    Use the AFN formula to forecast Baxter's Additional Funds Needed for the Coming Year

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    Baxter Video Products' sales are expected to increase from $5 million in 2007 to $6 million in 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 were $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 formula to forecast Baxter's additional funds needed for the coming year.

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    Solution Preview

    The AFN equation is
    AFN = (A*/S0)ΔS - (L*/S0)ΔS - MS1(1 - d)

    A* = total assets now 3,000,000
    S0 = ...

    Solution Summary

    The solution explains how to calculate the additional funds needed.