Corporate Valuation and Financial Planning: The AFN Equation

Corporate Valuation and Financial Planning: The AFN Equation Managers use projected financial statements in four ways: (I) By looking at projected statements, they can assess whether the firm's anticipated performance is n line with the firm's own general targets and with investors' expectations. (2) Pro forma statements can be used to estimate the effect of proposed operating changes, enabling managers to conduct "what if" analyses. (3) Managers use pro forma statements to anticipate the firm's future financing needs. (4) Managers forecast free cash flows under different operating plans, forecast their capital requirements, and then choose the plan that maximizes shareholder value. Security analysts make the same types of projections, forecasting future earnings, cash flows, and stock prices. Increasing sales require additional assets, these assets must be financed, and it may or may not be possible to obtain all the funds needed for the firm's business plan. A key element in the financial forecasting process is to determine ocapital (interest-bearing debt and preferred and common stock) that will be necessary to acquire the required assets. The AFN equation financing requirements through the AFN equation. Additional funds needed are the amount of external v approximates the funds needed assuming that ratios The AFN equation is written as follows: A dditiona,l funds Required increase needed, or AFN in assets Increase in spontaneous liabilities Increase in retained ear mngs AFN = (Ao - (Lo /so)AS - Sl x M - Payout ratio) The AFN equation shows the relationship of v Ofunds needed by a firm to its projected increase in assets, the increase in spontaneous liabilities, and the increase in retained earnings. Rapidly growing companies require larger increases ir rowth is an important factor to the firm's AFN. The -Select- assets; other things held constant, so v oratio is the ratio of assets required per dollar of sales. Companies with higher assets-to-sales ratios require more assets for 0 need for external financing. -Select- a given increase in sales, hence a -Select- v v Ofunds anse out of normal business operations from its suppliers, employees, and the government that reduce the firm's need for external othe profit margin, the larger the net income available to support increases in assets, hence the v Othe need for external financing. The v oratio is the proportion of net income that is reinvested in financing. The v u. The higher the oratio, the lower the firm's AFN. The v Ogrowth rate is the maximum achievable growth rate without the firm having to raise the firm, and it is calculated as I minus external funds. In other words, it is the growth rate at which the firm's AFN equals zero. Show All Feedback Quantitative Problem I: Beasley Industries' sales are expected to increase from $5 million in 2017 to SS million in 2018, or by 20%. Its assets totaled $2 million at the end of 2017. Beasley is at full capacity, so Its assets must grow in proportion to projected sales. At the end of 2017, current liabilities are $800,000, consisting of $130,000 of accounts payable, $500,000 of notes payable, and $170,000 of accrued liabilities. Its profit margin is forecasted to be and its dividend payout ratio is 50%. using the AFN equation, forecast the additional funds Beasley will need for the coming year. Do not round intermediate calculations. Round your answer to the nearest dollar. S 11200(