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AFN = ( A 0 * * S 0 ) S - ( L 0 * * S 0 ) S - M 1 (
AFN Payout
The AFN equation shows the relationship of
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funds needed by a firm to its projected increase in assets, the spontaneous increase in
liabilities, and the increase in retained earnings. Rapidly growing companies require larger increases in assets; other things held constant, so
growth is an important factor to the firm's AFN. The
ratio is the ratio of assets required per dollar of sales. Companies with
higher assetstosales ratios require more assets for a given increase in sales, hence a
need for external financing.
funds arise out of normal business operations from its suppliers, employees, and the government that reduce the firm's need for external financing.
The
the profit margin, the larger the net income available to support increases in assets, hence the
the need for external
financing. The
The higher the
ratio is the proportion of net income that is reinvested in the firm, and it is calculated as minus the
ratio, the lower the firm's AFN. The
growth rate is the maximum achievable growth rate without the firm
having to raise external funds. In other words, it is the growth rate at which the firm's AFN equals zero.
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