Additional Funds Needed

Holloway & Unger Global (HUG) is planning its operations for the coming year, and the CEO wants you to forecast the firm's additional funds needed (AFN). Data for use in the forecast are shown below. The board has decided to consider the investment bankers' recommendation of a higher payout ratio. However, the CEO is concerned about the impact of a change in the payout ratio from the 10% that was used in the past to 30%, which the firm's investment bankers have recommended. Based on the AFN equation, by how much would the AFN for the coming year change if HUG increased the payout from 30% to the new and higher level? All dollars are in millions. Last year's sales = S0 = $495 Last year's accounts payable $75 Sales growth rate = g = 30% Last year's notes payable = $15 Last year's total assets = A0* = $625 Last year's accruals = $20 Last year's profit margin = PM= 15% Initial payout ratio = 10% New payout ratio = 30%

1) Walk through your calculation and analysis of the firms AFN.

2) Suppose the board of directors for HUG does not want to raise the payout ratio to 30%. What other options could be employed as a compromise? Present your recommendations and how it might affect the AFN and shareholder/stakeholder perspectives on the firms value.