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Maximum Growth Rate Answer: B Diff: T

This document provides an example of calculating a company's additional funding needs (AFN) using the AFN formula. It gives financial details for a company including sales, assets, liabilities, growth rate and dividend payout ratio. It then works through the calculation of the company's AFN, projected current assets, current liabilities, and new current ratio.

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Kaye Javellana
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29 views1 page

Maximum Growth Rate Answer: B Diff: T

This document provides an example of calculating a company's additional funding needs (AFN) using the AFN formula. It gives financial details for a company including sales, assets, liabilities, growth rate and dividend payout ratio. It then works through the calculation of the company's AFN, projected current assets, current liabilities, and new current ratio.

Uploaded by

Kaye Javellana
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

38.

Maximum growth rate Answer: b Diff: T

Let S = S0(g), S1 = S0(1 + g), RR = (1 - d) = (1 - 0.5) = 0.5, and AFN = 0.


Find g = ?

A* L*
AFN = (S0)(g) - (S0)(g) - MS0(1 + g)(RR) = 0.
S0 S0
$10,000
0 = 1.2($100,000g) - ($100,000g) - (0.10)($100,000)(1 + g)(0.5)
$100,000
0 = $120,000g - $10,000g - $5,000g - $5,000
$5,000 = $105,000g
g = 4.76%  4.8%.

39. AFN formula method Answer: b Diff: T

Facts given: M = 5%; RR = (1 - 0.4) = 0.6; S0 = $6,000 million; A* =


$1,500 million (Firm at full capacity); S1 = 1.30  $6,000 million = $7,800
million; S = 0.3  $6,000 million = $1,800 million; L* = $200 million +
$200 million = $400 million. (From balance sheet.)

Step 1: Use the AFN formula to determine the additional funds needed:
A* L*
AFN = (S) - (S) – MS1(RR)
S0 S0
$1,500 $400
= ($1,800) – ($1,800) - [(0.05)($7,800)(0.6)]
$6,000 $6,000
= $450 - $120 - $234
= $96 million.

The company needs $96 million in additional funds, which it will


raise with short-term bank loans.

Step 2: Determine the new projected level of current assets:


CA = $600/$6,000  $7,800 = $780 million.

Step 3: Determine the new projected level of current liabilities:


CL = A/P + Accrued liabilities + ST Loans
= ($200/$6,000  $7,800) + ($200/$6,000  $7,800) + $96
= $520 + $96
= $616 million.

Step 4: Determine the firm’s new current ratio:


CR = CA/CL = $780/$616
= 1.27.

Chapter 17 - Page 32

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