# Answer to Question #6718 in Finance for jacqueline davis

Question #6718
Howton & Howton Worldwide (HHW) is planning its operations for the coming year, and the CEO wants you to forecast the firm&#039;s additional funds needed (AFN). 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 50%, which the firm&#039;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&rsquo;s sales = S0 \$300.0 Last year&rsquo;s accounts payable \$50.0 Sales growth rate = g 40% Last year&rsquo;s notes payable \$15.0 Last year&rsquo;s total assets = A0* \$500.0 Last year&rsquo;s accruals \$20.0 Last year&rsquo;s profit margin = PM 20.0% Initial payout ratio 10.0% a. \$31.9 b. \$33.6 c. \$35.3 d. \$37.0 e. \$38.9
1
2012-02-23T09:38:42-0500
b. \$33.6

Explanation:

AFN = projected increase in assets &ndash; spontaneous increase in liabilities &ndash; increase in retained earnings

The company is at full capacity, so assets must grow at the same rate as projected sales: \$500*1.4=\$700, projected increase in assets = \$700 - \$500 =
\$200

Total sales = \$300 *1.4 = \$420

spontaneous increase in liabilities = X, 20/500 = X/700 =&gt; X = 28

For payout ratio = 10%:
Increase in Retained earnings = Net Income = 420 X 20% = 84, Dividend = 10% =
84X10%=8.4.
Increase in retained earnings = 84-8.4 = 75.6
AFN = \$200 &ndash; \$28 &ndash; \$75.6 = \$96.4 million

For payout ratio = 50%:
Increase in Retained earnings = Net Income = \$420 * 20% = \$84, Dividend = 50% = \$84 * 50%=\$42.
Increase in retained earnings = \$84 - \$42 = \$42
AFN = \$200 &ndash; \$28 &ndash; \$42 = \$130 million

AFN change = \$130 - \$96.4 = \$33.6

Need a fast expert's response?

Submit order

and get a quick answer at the best price

for any assignment or question with DETAILED EXPLANATIONS!