Assignment 1 December 31, 2020 Corporate Finance

Name: AQIB ALI

Roll No: 18236048
Question

Baxter Video Products's sales are expected to increase by 20% from $5 million in 2010 to $6
million in 2011. Its assets totaled $3 million at the end of 2010. Baxter is already at
full capacity, so its assets must grow at the same rate as projected sales. At the end of
2010, current liabilities were $1 million, consisting of $250,000 of accounts
payable, $500,000 of notes payable, and $250,000 of accruals. The after tax profit
margin is forecasted to be 5%, and the forecasted payout ratio is 70%. Use the AFN equation
to forecast Baxter's additional funds needed for the coming year

Solution:
AFN = (A*/S0)∆S - (L*/S0)∆S - MS1(1 - d)
$3,000,000 $500 ,000
=
( $5,000,000 ) $1,000,000 -
( $5,000,000 ) $1,000,000 -
0.05($6,000,000)(1 - 0.7)
= (0.6)($1,000,000) - (0.1)($1,000,000) - ($300,000)(0.3)
= $600,000 - $100,000 - $90,000
= $410,000.

Question:
Brown & Sons recently reported sales of $100 million, and net income equal to $5 million.  The
company has $70 million in total assets.  Over the next year, the company is forecasting a 20
percent increase in sales. Since the company is at full capacity, its assets must increase in
proportion to sales.  The company also estimates that if sales increase 20 percent, spontaneous
liabilities will increase in same proportion. Current spontaneous liabilities are 1 million.  If the
company’s sales increase, its profit margin will remain at its current level.  The company’s
dividend payout ratio is 40 percent.  Based on the AFN formula, how much additional capital
must the company raise in order to support the 20 percent increase in sales
Solution 2:

AFN = (A*/S0)∆S - (L*/S0)∆S - MS1(1 - d)

$ 70 1
= $ 100 20 - 100 ) 20 - 0.05(120)(0.6)
( ) (
= 14 – 0.2 -3.6
AFN=10.2M
10.2M fund will be needed