Bohemian Manufacturing Company has the following end-of-year balance sheet: Bohemian Manufacturing Company
Balance Sheet
For the Year Ended on December 31
Assets Liabilities
Current Assets: Current Liabilities:
Cash and equivalents $150,000 Accounts payable $250,000
Accounts receivable 400,000 Accrued liabilities 150,000
Inventories 350,000 Notes payable 100,000
Total Current Assets $900,000 Total Current Liabilities $500,000
Net Fixed Assets: Long-Term Bonds 1,000,000
Net plant and equipment $2,100,000 Total Debt $1,500,000
(cost minus depreciation)
Common Equity
Common stock 800,000
Retained earnings 700,000
Total Common Equity $1,500,000
Total Assets $3,000,000 Total Liabilities and
Equity $3,000,000
The firm is currently in the process of forecasting sales, asset requirements, and required funding for the coming year. In the year that just ended, Bohemian Manufacturing Company generated $450,000 net income on sales of $13,000,000. The firm expects sales to increase by 18% this coming year and also expects to maintain its long-run dividend payout ratio of 40%.
Suppose Bohemian Manufacturing Company's assets are fully utilized. Use the additional funds needed (AFN) equation to determine the increase in total assets that is necessary to support Bohemian Manufacturing Company's expected sales.
a. $513,00
b. $567,00
c. $594,000
d. $540,00
When a finm grows, some liabilities grow spontaneously along with sales. Spontaneous liablities are a source of capital that the fim will generate internally, so they reduce the need for extemal capital. How much of the total increase in assets will be supplied by spontaneous liabilities for Bohemian Manufacturing Company this year?
a. $75,600
b. $79,200
c. $68,400
d. $72,000
In addition, Bohemian Manufacturing Company is expected to generate net income this year. The fim will pay out some of its earnings as dividends but will retain the rest for future asset investment. Again, the more a fim generates internally from its operations, the less it will have to raise extemally from the capital markets. Assume that the fim's profit margin and dividend payout ratio are expected to remain constant.
Given the preceding information, Bohemian Manufacturing Company is expected to generateoperations that wl be added to retained eanings from According to the AFN equation and projections for Bohemian Manufacturing Company, the fim's AFN is $.

1. Increase in Assets:

d. $540,00

2. Spontaneous Liabilities:

d. $72,000

3. Given the preceding information, Bohemian Manufacturing Company is expected to generate__$318,458 income from operations that will be added to retained earnings from the total net income of $513,000 ($450,000 x 1.18).

4. According to the AFN equation and projections for Bohemian Manufacturing Company, the firm's AFN is $__149,542__.

Explanation:

Solution

1. Additional Funds Needed = Increase in Assets − Increase in Liabilities – Increase in Retained Earnings, according to xplaind.com.

a) Increase in Assets

= Assets × sales growth rate

= $3,000,000 × 18%

= $540,000

Spontaneous Increase in Liabilities

= Liabilities × sales growth rate

= $400,000 × 18%

= $72,000

Increase in Retained Earnings

= Current sales × profit margin × retention rate

= Current sales × (1 + sales growth rate) × profit margin × retention rate

= $13,000,000 × (1 + 18%) × 3.46% × 60% = $318,458

Additional Funds Needed

= $540,000 - $72,000 - $318,458

= $149,542

2. Data:

Bohemian Manufacturing Company

Balance Sheet

For the Year Ended on December 31

Assets Liabilities

Current Assets:                                   Current Liabilities:

Cash and equivalents $150,000      Accounts payable            $250,000

Accounts receivable     400,000      Accrued liabilities               150,000

Inventories                    350,000      Notes payable                    100,000

Total Current Assets $900,000       Total Current Liabilities $500,000

Net Fixed Assets:                               Long-Term Bonds         1,000,000

Net plant & equipment $2,100,000 Total Debt                    $1,500,000

                                                           Common Equity

                                                           Common stock               800,000

                                                           Retained earnings          700,000

                                                         Total Common Equity $1,500,000

Total Assets         $3,000,000   Total Liabilities & Equity $3,000,000

3. Current profit margin = Net Income/Sales x 100 = $450,000/$13,000,000 x 100 = 3.46%

4. Retention Rate = (1 - dividend payout ratio) = (1 - 40%) = 60%

5. AFN = Additional Funds Needed.  AFN is the financial resources obtained from external sources to finance the increase in assets which supports the increased sales level.  Note that "Bohemian Manufacturing Company's assets are fully utilized," so we do not envisage the acquisition of more fixed assets.  In view of this, the liabilities that are expected to increase are only the Accounts Payable and Accrued Liabilities, two vital sources of supply chain funding.