Question

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?

Answer 1

Based on the AFN equation, the AFN for the coming year will be -$16000.

How to calculate the AFN?

Last year's sales =$200,000

Sales growth rate = g = 40%

Forecasted sales = S0 × (1 + ) = 280,000

∆S = change in sales = S1 − S0 = $80,000

Last year's total assets = A*0 = A*0 since full capacity $135,000

Forecasted total assets = A*1 = A*0 × (1 + g) = $189,000

Last year's accounts payable = $50,000

Last year's accruals= $20,000

L*0 = payables + accruals = $70,000

Profit margin = M = 20.0%

Target payout ratio = 25.0%

Retention ratio = (1 − Payout) = 75.0%

AFN = (A*0/S0)ΔS – (L*0/S0)ΔS – Margin × S1 × (1 − Payout)

AFN = $54,000 – $28,000 – $42,000

= -$16,000

The complete question goes thus:

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.

Last year's sales = $200,000

Sales growth rate = 40%

Last year's accounts payable = $50,000

Last year's notes payable = $15,000

Last year's accruals = $20,000

Based on the AFN equation, what is the AFN for the coming year?

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