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    Additional Funds Needed

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    My company recently reported sales of $100 million, and net income equal to $5 million. My company has $70 million in total assets. Over the next year, I'm forecasting a 20 percent increase in sales. Since my company is at full capacity, its assets must increase in proportion to sales. I estimate that if sales increase 20 percent, spontaneous liabilities will increase by $2 million. If the company=s sales increase, its profit margin will remain at its current level. The dividend payout ratio is 40 percent. Based on the AFN formula, how much additional capital must my company raise in order to support the 20 percent increase in sales?

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    Solution Preview

    AFN = (A*/S0)DS - (L*/S0)DS - MS1(1 - d)
    or we can write as
    AFN = Increase in Assets - Increase in spontaneous Liabilities - ...

    Solution Summary

    The solution explains how to calculate the additional funds needed.