# 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

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