You have been asked to forecast the additional funds needed (AFN) for Smith Corp. which isplanning its operation for the coming year. The firm is operating at full capacity. Data for use in theforecast are shown below. However, the CEO is concerned about the impact of a change in the payoutratio from the 10% that was used in the past to 50%, which the firm's investment bankers haverecommended. Based on the AFN equation, by how much would the AFN for the coming year changeif Smith increased the payout from 10% to the new and higher level? All dollars are in millions. Showyour solution using the forecasted financial statement method and the AFN equation. Assume thatassets and spontaneous liabilities are expected to increases by the same percentage as sales.1)$300.0 Last year's accounts payable40% Last year's notes payableLast year's sales = So$50.0Sales growth rate = gLast year's total assets = A*$15.0Last year's profit margin = PM$500.0 Last year's accruals20.0% Initial payout ratio$20.010.0%

The computation of change in additional fund needed as follows:

Answered: You have been asked to forecast the…

Essentials Of Investments

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

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You have been asked to forecast the additional funds needed (AFN) for Houston, Hargrove, & Worthington (HHW), which is planning its operation for the coming year. The firm is operating at full capacity. Data for use in the forecast are shown below. However, the CEO is concerned about the impact of a change in the payout ratio from the 10% that was used in the past to 55%, which the firm's investment bankers have recommended. Based on the AFN equation, by how much would the AFN for the coming year change if HHW increased the payout from 10% to the new and higher level? All dollars are in millions. Last year's sales = S0 $300.0 Last year's accounts payable $50.0 Sales growth rate = g 40% Last year's notes payable $15.0 Last year's total assets = A0* $500 Last year's accruals $20.0 Last year's profit margin = PM 20.0% Initial payout ratio 10.0% Select the correct answer. a. $34.4 b. $42.9 c. $37.8 d. $41.2…
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