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

Bohemian Manufacturing Company reported sales of $820,000 at the end of last year; but this year, sales are expected to grow by 9%. BMC expects to maintain its current profit margin of 22% and dividend payout ratio of 25%. The firms total assets equaled $500,000 and were operated at full capacity. BMCs balance sheet shows the following current liabilities: accounts payable of $60,000, notes payable of $30,000, and accrued liabilities of $75,000. Based on the AFN (Additional Funds Needed) equation, what is the firms AFN for the coming year?

-$131,821

-$114,627

-$143,284

-$149,015

A positively signed AFN value represents:

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

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

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, Bohemian Manufacturing Company is thinking about raising its dividend payout ratio to satisfy shareholders. BMC could pay out of its earnings to shareholders without needing to raise any external capital. (Hint: What can BMC increase its dividend payout ratio to before the AFN becomes positive?)