2. The Additional Funds Needed (AFN) equation

Green Moose Company has the following end-of-year balance sheet:

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, Green Moose Company generated $400,000 net income on sales of $13,500,000. The firm expects sales to increase by 17% this coming year and also expects to maintain its long-run dividend payout ratio of 35%.

a. Suppose Green Moose Companys assets are fully utilized. Use the additional funds needed (AFN) equation to determine the increase in total assets that is necessary to support Green Moose Companys expected sales. (Note: Do not round intermediate calculations.)

$612,000

$510,000

$484,500

$561,000

b. 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 Green Moose Company this year? (Note: Do not round intermediate calculations.)

$64,600

$81,600

$68,000

$74,800

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In addition, Green Moose 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.

c. Given the preceding information, Green Moose Company is expected to generate $ _____________ from operations that will be added to retained earnings. (Note: Do not round intermediate calculations.)

d. According to the AFN equation and projections for Green Moose Company, the firms AFN is $ _______________. (Note: Do not round intermediate calculations.)

Green Moose Company Balance Sheet For the Year Ended on December 31 Assets Liabilities \begin{tabular}{lclc} Current Assets: & \multicolumn{3}{c}{ Current Liabilities: } \\ \hline 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 \\ \hline Net Fixed Assets: & & Long-Term Bonds & 1,000,000 \\ Net plant and equipment & $2,100,000 & Total Debt & $1,500,000 \end{tabular} (cost minus depreciation)