3. The Additional Funds Needed (AFN) equation

Fuzzy Button Clothing Company has the following end-of-year balance sheet:

Fuzzy Button Clothing 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	$2,100,000	Total Debt	$1,500,000
(cost minus depreciation)
		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, Fuzzy Button Clothing Company generated $300,000 net income on sales of $12,500,000. The firm expects sales to increase by 18% this coming year and also expects to maintain its long-run dividend payout ratio of 45%.

1. Suppose Fuzzy Buttons assets are fully utilized. Using the additional funds needed (AFN) equation to determine the increase in total assets that is necessary to support a firms expected sales, it is projected that Fuzzy Button will require $_____ in additional assets. Pick one below.

A. $432,000

B. $486,000

C. $540,000

D. $567,000

2. 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 Fuzzy Button this year? Pick one below

A. $57,600

B.$75,600

C. $64,800

D. $72,000

In addition, Fuzzy Button Clothing 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.

3. Given the preceding information, Fuzzy Button expects to generate $___ from operations that will be added to its existing retained earnings. (Hint: Round your answer to the nearest whole dollar.)

4. According to the AFN equation and projections for Fuzzy Button Clothing Company, the firms AFN is $______

4. More on the AFN (Additional Funds Needed) equation

5. Fuzzy Button Clothing Company reported sales of $890,000 at the end of last year; but this year, sales are expected to grow by 10%. Fuzzy Button expects to maintain its current profit margin of 23% and dividend payout ratio of 20%. The firms total assets equaled $500,000 and were operated at full capacity. Fuzzy Buttons balance sheet shows the following current liabilities: accounts payable of $65,000, notes payable of $30,000, and accrued liabilities of $60,000. Based on the AFN (Additional Funds Needed) equation, what is the firms AFN for the coming year?

A. -$178,295

B. -$142,636

C. -$185,427

D. -$171,163

6. A positively signed AFN value represents

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

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

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

7. Because of its excess funds, Fuzzy Button Clothing Company is thinking about raising its dividend payout ratio to satisfy shareholders. Fuzzy Button could pay out (62.5%, 58.3%, 75.0%, 83.3%) of its earnings to shareholders without needing to raise any external capital. (Hint: What can Fuzzy Button increase its dividend payout ratio to before the AFN becomes positive?)

All these questions follow within one question I broke it down in parts.