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 40%, 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. $26.7 b. $20.7 c. $23.7 d. $22.2 e. $25.2
You have been asked to
| 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.
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Last year’s sales = 300
Sales growth rate = 40%
Forecasted sales = 300*1.4 = 420
change in sales = 420-300 = 120
Last year’s total assets = 500
Forecasted total assets = 500*1.4 = 700
Last year’s accounts payable = 50
Last year’s notes payable = 15
Last year’s accruals = 20
Payables + accruals = 50 +20 = 70
Profit margin = 20%
Target payout ratio = 10%
Retention ratio = (1 – Payout) = 90%
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