2. The AFN equation
2. The AFN equation Aa Aa E Green Caterpillar Garden Supplies Inc. has the following end-of-year balance sheet: Assets Current Assets: Cash and equivalents Accounts receivable Inventories Total Current Assets Green Caterpillar Garden Supplies Inc. Balance Sheet For the Year Ended on December 31 Liabilities Current Liabilities: $150,000 Accounts payable 400,000 Accrued liabilities 350,000 Notes payable $900,000 Total Current Liabilities $250,000 150,000 100,000 $500,000 Net Fixed Assets: Net plant and equipment (cost minus depreciation) Long-Term Bonds Total Debt 1,000,000 $1,500,000 $2,100,000 Common Equity Common stock Retained earnings Total Common Equity Total Liabilities and Equity 800,000 700,000 $1,500,000 $3,000,000 Total Assets $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, Green Caterpillar Garden Supplies Inc. generated $450,000 net income on sales of $12,500,000. The firm expects sales to increase by 15% this coming year and also expects to maintain its long-run dividend payout ratio of 45%. Suppose Green Caterpillar Garden Supplies Inc.'s assets are fully utilized. Use the additional funds needed (AFN) equation to determine the increase in total assets that is necessary to support Green Caterpillar Garden Supplies Inc.'s expected sales. O $472,500 0 $450,000 O $540,000 $360,000 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 Caterpillar Garden Supplies Inc. this year? O $60,000 $54,000 $69,000 $ 66,000 In addition, Green Caterpillar Garden Supplies Inc. 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 firm's profit margin and dividend payout ratio are expected to remain constant. Given the preceding information, Green Caterpillar Garden Supplies Inc. is expected to generate $ from operations that will be added to retained earnings. According to the AFN equation and projections for Green Caterpillar Garden Supplies Inc., the firm's AFN is $
