12.2.3

Blue Elk Manufacturing reported sales of $890,000 at the end of last year; but this year, sales are expected to grow by 6%. Blue Elkexpects to maintain its current profit margin of 20% and dividend payout ratio of 30%. The firms total assets equaled $475,000 and were operated at full capacity. Blue Elks balance sheet shows the following current liabilities: accounts payable of $80,000, notes payable of $40,000, and accrued liabilities of $75,000. Based on the AFN (Additional Funds Needed) equation, what is the firms AFN for the coming year?

-$141,095

-$112,876

-$124,164

-$129,807

A negatively-signed AFN value represents:

a surplus of internally generated funds that can be invested in physical or financial assets or paid out as additional dividends.

a shortage of internally generated funds that must be raised outside the company to finance the companys forecasted future growth.

a point at which the funds generated within the firm equal the demands for funds to finance the firms future expected sales requirements.

Because of its excess funds, Blue Elk is thinking about raising its dividend payout ratio to satisfy shareholders. What percentage of its earnings can Blue Elk pay to shareholders without needing to raise any external capital? (Hint: What can Blue Elk increase its dividend payout ratio to before the AFN becomes positive?)

89.8%

80.8%

67.4%

71.8%