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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

.

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