Question

In your internship with Lewis, Lee, & Taylor Inc. you have been asked to forecast the firm's additional funds needed (AFN) for next year. The firm is operating at full capacity. Data for use in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year?
Last year's sales = S0 $200,000 Last year's accounts payable $50,000
Sales growth rate = g 40% Last year's notes payable $15,000
Last year's total assets = A0* $120,000 Last year's accruals $20,000
Last year's profit margin = PM 20.0% Target payout ratio 25.0%
Select the correct answer.

A. -$22,080 B. -$22,000 C. -$21,960 D. -$22,120 E. -$22,040

Answer 1

Answer:

Option B. -$22,000

Step-by-step explanation:

Last year data :

Sales = $200,000

Profit margin = 20%

Total assets = $120,000

Accounts payable = $50,000

Accruals = $20,000

Sales growth rate = 40%

Calculate total increase in total assets :

Increase in total assets = Total assets × Growth rate

                                       = 120,000  × 40%

                                       = $48,000

Calculate increase in spontaneous liabilities :

Increase in spontaneous liabilities = (50,000 + 20,000)  ×  40%

                                                         = $28,000

Calculate increase in retained dividend :

calculate the increase sales :

        increased sales = 200,000 × (1 + 0.40)

                                   = 280,000

calculate profit margin for next year on increase sales :

      Profit margin on increased sales = 280,000 × 20%

                                                             = $56,000

Calculate retained earning :

       Retained earning = profit - payout of profit

                                     = 56,000 - ( 56,000 × 25% )

                                     = 56,000 - 14,000

                                     = $42,000

Calculate AFN :

AFN = Increase in assets - Increase in liabilities - increase in retained earning

       = 48,000 - 28,000 - 42,000

       = -$22,000

Option B. is the answer.