THE AFN MODEL

Monsanto Corporation

Income Statement for December 31, 2019

(Thousands of Dollars)

_____________________________________________________________________________________

Sales $15,000

Operating expenses -13,000

EBIT 2,000

Interest 400

EBT 1,600

Taxes (40%) 640

Net income 960

Cash dividends (40%) 384

Added retained earnings $576

Monsanto Corporation

Income Statement for December 31, 2019

(Thousands of Dollars)

Cash 1,000 Accounts payable $ 1,600

Accounts receivable 2,000 Bank Loan 1,800

Inventories 2,200 Accrued liabilities 1,200

Total current assets 5,200 Total current liabilities 4,600

Long-term debt 2,200

Fixed assets, net 6,800 Common stock 2,400

Total assets $12,000 Retained earnings 2,800

Total liabilities & equity $12,000

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Assumptions:

The Company expects the growth in sales of 20% over its 2019 level.

The company operates at full capacity

1 Identify the:

Spontaneous Financing Variables: All LT & ST assets and non-interest bearing liabilities.

Discretionary Financing Variables: all others.

2 What is the sustainable (inorganic) growth rate?

ROE x Retention Rate / [1 ROE x Retention rate]

Net Inc./Total Common Equity x Retention Rate / [1 - Net Inc./Total Common Equity x

Retention Rate]

= $ 960 / $5,200 x 0.6 /[ 1 - $960/$5,200 x 0.6)

= 12.49%

3 What is the internal (organic) growth rate?

= Net Inc./TA x Ret. Rate / [1 Net Inc./TA x Ret Rate]

= $960/$12,000 x 0.60 / [1 $960/$12,000 x 0.60 ]

= 5.04%

4 What is the funding required to support the growth in sales?

Additional Fund Needed (AFN) = TAo/So (S) - (APo + ALo) (S) -Net Inc_0o/So (S1) x Ret Rate.

AFN = (750,000/1,000,000 x 300,000) (100,000/1,000,000 x 300,000)

(1,300,000 x 50,000/1,000,000) x 1.00

= (.75 x 300,000) (.10 x 300,000) (1,300,000 x .05) x 1.00

= 225,000 30,000 65,000

= $ 130,000

5 Should funding be long term or short term? Why?

6. Describe in 100 or so relevant words on the calculations and findings above defining terminologies as

you use them in the process:

As a reminder the following assignment was given at the end of class to reinforce the methodology of the AFN Model:

Period Variables	Current	Projected		Current	Projected		Current	Projected
Sales	$100,000	$120,000	Assets			Liab.&Own -ers Equ.
Cost	$ 75,000		Short Term	$60,000		Debt	$40,000
Net Income			Long Term	$20,000		Equity	$40,000

As we said in class all models are built on assumptions:

1 Dividend payout ratio is 50% therefore, the retention rate is the remainder

2 All assets and noninterest bearing liabilities vary is the same proportion as sales

3 Use the following equation to find the additional funding needed (AFN):

AFN) = LTAo/So (S) + LTSAo (S) - (APo + ALo) (S) -Net Inc_0o/So (S1) x Retention Rate.

REQUIRED:

1 Find the AFN using the model equation above

2 Fill in the blanks in the table above.

3. Write a paragraph on findings or conclusion after your perform the algorithmic modelling