Assignment:
(1) Define each of the following terms:
a. Operating plan; financial plan
b. Spontaneous liabilities; profit margin; payout ratio
c. Additional funds needed (AFN); AFN equation; capital intensity ratio; selfsupporting growth rate
d. Forecasted financial statement approach using percent of sales
e. Excess capacity; lumpy assets; economies of scale
f. Full capacity sales; target fixed assets/sales ratio; required level of fixed assets
(2) Name five key factors that affect a firm's external financing requirements.
(3) Maggie's Muffins, Inc., generated $5,000,000 in sales during 2013, and its year-end total assets were $2,500,000. Also, at year-end 2013, current liabilities were $1,000,000, consisting of $300,000 of notes payable, $500,000 of accounts payable, and $200,000 of
accruals. Looking ahead to 2014, the company estimates that its assets must increase at the same rate as sales, its spontaneous liabilities will increase at the same rate as sales, its profit margin will be 7%, and its payout ratio will be 80%. How large a sales increase can the company achieve without having to raise funds externally-that is, what is its selfsupporting growth rate?
(4) The Booth Company's sales are forecasted to double from $1,000 in 2013 to $2,000 in 2014. Here is the December 31, 2013, balance sheet:
Cash $ 100 Accounts payable $ 50 Accounts receivable 200 Notes payable 150 Inventories 200 Accruals 5 Net fixed assets 500 Long-term debt 400 Common stock 100
______ Retained earnings __250
Total assets $1,000Total liabilities and equity $1,000
Booth's fixed assets were used to only 50% of capacity during 2013, but its current assets were at their proper levels in relation to sales. All assets except fixed assets must increase at the same rate as sales, and fixed assets would also have to increase at the same rate if the current excess capacity did not exist. Booth's after-tax profit margin is forecasted to be 5% and its payout ratio to be 60%. What is Booth's additional funds needed (AFN) for the coming year?