a.
To prepare: The financial statement of M Incorporation for the year ended 2016.
Additional Funds Needed (AFN) Equation:
The AFN equation explains the amount of money that a company needs to fulfill the financial needs of the company. It gives the information related to the external financing, as the options available to a company to finance through external financing methods. This equation basically gives a new capital structure that includes an optimum mix of debt, preferred and common stock.
Financial Statement:
The financial statement is
a.
Explanation of Solution
Prepare Income statement,
Table (1)
Prepare statement of retained earnings
Table (2)
Prepare Balance sheet
Table (3)
Working Notes:
Calculation of increase in sales:
Calculation of operating cost including depreciation
Calculation of the dividend amount:
Calculation of dividend payout ratio:
Calculation of AFN equation:
Calculation of the distribution of additional funds:
Calculation of interest on bonds:
Calculation of taxes:
Calculation of increase in cash:
Calculation of increase in receivables:
Calculation of increase in inventories:
Calculation of increase in fixed assets:
Calculation of notes payable:
Calculation of total liability:
Calculation of accrued liability:
Calculation of the amount of accounts payable:
Calculation of dividend of 2016:
b.
To compute: The growth in sales using AFN equation.
Additional Funds Needed (AFN) Equation:
The AFN equation explains the amount of money that a company needs to fulfill the financial needs of the company. It gives the information related to the external financing, as the options available to a company to finance through external financing methods. This equation basically gives a new capital structure that includes an optimum mix of debt, preferred and common stock.
Financial Statement:
The financial statement is final accounts of the company. Financial statement of the company contains the income statement, statement of retained earnings, balance sheet and cash flow statement.
b.
Explanation of Solution
Given:
Sales in 2015 is $3,600,000
Sales in 2016 is $3,960,000
Current liability at the end of 2015 is $596,000. It includes $360,000 of accounts payable, $56,000 of notes payable, and $180,000 of accrued liability
Forecasted retention ratio is 60%.
The formula to calculate the additional funds is:
Where,
Substitute $2,700,000 for current assets, $3,600,000 for current sales, $3,960,000 for expected sales, assume growth rate of sales is g
Thus, the growth in sales of M Incorporation is $135,384.615.
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Chapter 17 Solutions
Study Guide For Brigham/houston's Fundamentals Of Financial Management, 14th
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