Question
1. The Additional Funds Needed (AFN) equation Bohemian Manufacturing Company has the following end-of-year balance sheet: Bohemian Manufacturing Company Balance Sheet For the Year Ended
1. The Additional Funds Needed (AFN) equation
Bohemian Manufacturing Company has the following end-of-year balance sheet:
Bohemian Manufacturing Company
Balance Sheet
For the Year Ended on December 31
Assets | Liabilities | ||
Current Assets: | Current Liabilities: | ||
Cash and equivalents | $150,000 | Accounts payable | $250,000 |
Accounts receivable | 400,000 | Accrued liabilities | 150,000 |
Inventories | 350,000 | Notes payable | 100,000 |
Total Current Assets | $900,000 | Total Current Liabilities | $500,000 |
Net Fixed Assets: | Long-Term Bonds | 1,000,000 | |
Net plant and equipment(cost minus depreciation) | $2,100,000 | Total Debt | $1,500,000 |
Common Equity | |||
Common stock | 800,000 | ||
Retained earnings | 700,000 | ||
Total Common Equity | $1,500,000 | ||
Total Assets | $3,000,000 | Total Liabilities and Equity | $3,000,000 |
The firm is currently in the process of forecasting sales, asset requirements, and required funding for the coming year. In the year that just ended, Bohemian Manufacturing Company generated $400,000 net income on sales of $14,000,000. The firm expects sales to increase by 17% this coming year and also expects to maintain its long-run dividend payout ratio of 40%.
Suppose Bohemian Manufacturing Companys assets are fully utilized. Use the additional funds needed (AFN) equation to determine the increase in total assets that is necessary to support Bohemian Manufacturing Companys expected sales.
$459,000
$510,000
$561,000
$484,500
When a firm grows, some liabilities grow spontaneously along with sales. Spontaneous liabilities are a source of capital that the firm will generate internally, so they reduce the need for external capital. How much of the total increase in assets will be supplied by spontaneous liabilities for Bohemian Manufacturing Company this year?
$68,000
$64,600
$61,200
$74,800
In addition, Bohemian Manufacturing Company is expected to generate net income this year. The firm will pay out some of its earnings as dividends but will retain the rest for future asset investment. Again, the more a firm generates internally from its operations, the less it will have to raise externally from the capital markets. Assume that the firms profit margin and dividend payout ratio are expected to remain constant.
Given the preceding information, Bohemian Manufacturing Company is expected to generate
from operations that will be added to retained earnings.According to the AFN equation and projections for Bohemian Manufacturing Company, the firms AFN is
.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started