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Tutorial: Finn-400 Section 2

The document provides an explanation of the additional funds needed (AFN) equation, which is used to calculate the amount of additional funds a company needs to raise in order to support an increase in sales. The AFN equation factors in the projected increase in assets needed to support higher sales, as well as any spontaneous increase in liabilities or increase in retained earnings from higher profits. An example is provided to demonstrate how the AFN equation is applied using data from a sample company.

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mehar noor
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23 views

Tutorial: Finn-400 Section 2

The document provides an explanation of the additional funds needed (AFN) equation, which is used to calculate the amount of additional funds a company needs to raise in order to support an increase in sales. The AFN equation factors in the projected increase in assets needed to support higher sales, as well as any spontaneous increase in liabilities or increase in retained earnings from higher profits. An example is provided to demonstrate how the AFN equation is applied using data from a sample company.

Uploaded by

mehar noor
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Tutorial

Finn-400 Section 2
Additional Funds Needed
• Amount of money raised to support increase level of sales
• Financial Ratios do not change
• Must be operating at full capacity
• Doesn’t include long term debt
• Value can be negative
ΔS ΔS
= A0 × − L0 × − S1 × PM × b
S0 S0
Where,
Ao = current level of assets
Lo = current level of liabilities
ΔS/So = percentage increase in sales i.e. change in sales divided by current sales
S1 = new level of sales
PM = profit margin
b = retention rate = 1 – payout rate
Example
• XYZ Company has the following data .
Assets: Current Assets 600,000 Fixed Assets: 400,000
Total Assets=1,000,000
Claims:
Accounts Payable= 100,000 Accruals= 100,000
Long term Debt=300,000 Notes Payables= 100,000
Total Equity=300,000
Dividend Payout Ratio= 50% Sales= 5,000,000
Net Income=100,000
The AFN equation is as follows:
AFN = Projected increase in assets – spontaneous increase in liabilities – any increase
in retained earnings

AFN = (A* / S0) ΔS – (L* / S0) ΔS – MS1 (RR)

Additional
A* = Assets tied directly to sales and will increase
L* = Spontaneous liabilities that will be affected by sales.

Funds
S0 = Sales during the last year
S1 = Total sales projected for next year (the new level of sales).

Needed
ΔS = the increase in sales between S0 and S1
M = Profit margin, or the profit per unit of sales
MS1 = Projected Net Income
RR = the retention ratio from Net Income and is also calculated as (1 – payout ratio)

The relevant ratios within the formula are:


(A*/S0): Called the capital intensity ratio
(L*/S0): Called the spontaneous liabilities ratio
Additional
funds
requirements
for the year
2002 and 2003
NAL
American Greetings
• Weighted Average Shares Repurchase
Share
Repurch
ase
Black Scholes Model

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