Chua Chang & Wu Inc. is planning its operations for next year, and the CEO wants you to forecast the firm's additional funds needed (AFN) . 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 (to bank)
$15,000
Last year's total assets = A₀
$135,000
Last year's accruals
$20,000
Last year's profit margin = M
20) 0%
Target payout ratio
25) 0%

Question

Quizplus · Accepted Answer

AFN = (A*/S0)ΔS - (L*/S0)ΔS - MS1RR
where:
A* = target assets/ sales ratio
S0 = last year's sales
ΔS = projected increase in sales
L* = target liabilities/ sales ratio
MS1RR = retained earnings required
Plug in the given values:
A* = ($135,000/$200,000) = 0.675
L*/S0 = [$50,000 + ($15,000/2)]/$200,000 = 0.325
ΔS = 40% × $200,000 = $80,000
MS1RR = (1 - 0.25) × 0.2 × $200,000 = $30,000
AFN = [($135,000/$200,000) × $80,000] - [(($50,000 + ($15,000/2))/$200,000) × $80,000] - $30,000 = -$16,000
Therefore, the AFN for the coming year is -$16,000. (Option C is correct)