Hello Bartleby team, I've gone ahead and attached a screenshot of my question.Please note: The screenshot image with the Quantitative Problem is the question needing to be answered. The other screenshot is for reference if you need any of the information from that page.Let me know if you need any further details. Thank you for any answers and/or explanations you may provide! **Financial Planning and Forecasting: The Additional Funds Needed (AFN) Equation: Introduction**Managers use projected financial statements to achieve four primary objectives:1. They assess whether the firm’s anticipated performance aligns with its internal targets and investors’ expectations using these projections.2. They estimate the impact of proposed operating changes.3. They anticipate the firm’s future financing needs to arrange necessary funding.4. They estimate free cash flows to determine the firm’s overall value.Managers forecast free cash flows under different operating plans, assessing capital requirements to maximize shareholder value. Security analysts also use such projections to guide investors who determine the future of firms.**Increasing Sales and Financial Needs:**As sales increase, additional assets may be required, and obtaining all needed funds might not be feasible just from planned sources. A critical part of financial forecasting is determining *external capital* requirements (interest-bearing debt, preferred stock, common stock). The AFN equation estimates these needs, assuming constant ratios.**AFN Equation:**\[\text{AFN} = \frac{A_0}{S_0} \Delta S - \frac{L_0}{S_0} \Delta S - M(S_1 - \text{Payout})\]- **Additional Funds Needed (AFN):** Represents the required external funding for a projected increase in assets.- **Projected Increase in Assets:** Calculated based on current assets-to-sales ratio.- **Spontaneous Increase in Liabilities:** Natural liabilities increase associated with sales.- **Increase in Retained Earnings:** Net income retained in the firm.**Understanding the AFN Equation:**The equation illustrates how funds needed relate to asset growth, spontaneous liability increases, and retained earnings. Rapidly growing companies often need significant asset increases related to sales growth. - **Profit Margin:** Impacts external financing needs.- **Retention Ratio:** Proportion of net income reinvested in the business, determined as $1 - \text{sustainable growth rate}$.**Sustainable Growth Rate:**This rate is the maximum growth achievable without external funding. It’s critical for understanding how a firm can expand without affecting external borrowing or equity funding. The AFN equation is essential for financial forecasting, helping managers and analysts predict future financing needs and aligning financial strategies with growth objectives. **Quantitative Problem 1:**Beasley Industries' sales are expected to increase from $4 million in 2019 to $5 million in 2020, a rise of 25%. Its assets totaled $2 million at the end of 2019. Beasley is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2019, current liabilities are $770,000, consisting of $150,000 of accounts payable, $450,000 of notes payable, and $170,000 of accrued liabilities. The profit margin is forecasted to be 4%, and the 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.\[\text{AFN} = \]The AFN equation assumes that ratios remain constant. However, firms are not always operating at full capacity so adjustments need to be made to the existing asset forecast. Excess capacity adjustments are changes made to the existing asset forecast because the firm is not operating at full capacity. For example, a firm may not be at full capacity with respect to its fixed assets. First, the firm's management must find out the firm's full capacity sales as follows:\[\text{Full capacity sales} = \frac{\text{Actual sales}}{\text{Percentage of capacity at which fixed assets were operated}}\]Next, management would calculate the firm's target fixed assets ratio as follows:\[\frac{\text{Total fixed assets}}{\text{Full capacity sales}} = \frac{\text{Actual fixed assets}}{\text{Actual sales}}\]Finally, management would use the target fixed assets ratio with the projected sales to calculate the firm’s required level of fixed assets as follows:\[\text{Required level of fixed assets} = \left( \frac{\text{Target fixed assets}}{\text{Sales}} \right) \times \text{Projected sales}\]**Quantitative Problem 2:**Mitchell Manufacturing Company has $1,600,000 in sales and $290,000 in fixed assets. Currently, the company's fixed assets are operating at 75% of capacity.a. What level of sales could Mitchell have obtained if it had been operating at full capacity? Do not round intermediate calculations. Round your answer to the nearest dollar.$\_\

Additional Funds Needed: Additional funds needed is a business concept applied when a firm looks to…

Answered: Using the AFN equation, forecast the…

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS