Reference no: EM132779001

Mayor company sales are expected to increase by 20% from $5 million in 2018 to $6 million in 2019. Its assets totaled $7 million at the end of 2018. Mayor is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2018, current liabilities were $1.2 million, consisting of $500,000 of accounts payable, $300,000 of notes payable, and $400,000 of accruals. The after-tax profit margin is forecasted to be 5%, and the forecasted payout ratio is 60%.

Prpblem a. Use the AFN equation to forecast Mayor's additional funds needed for the coming year.
Equation for
AFN = (A0*/S0)?S - (L0*/S0)?S - M(S1)(1 - Payout)
Variables in AFN equation
S0: Most recent sales.
g: Growth rate in sales.
S1: Projected sales.
DS: Increase in sales = g(S0).
A0*: Assets required to support sales.
L0*: Spontaneous liabilities.
A0*/S0: Capital intensity ratio.
L0*/S0: Spontaneous liabilities ratio.
M: Profit margin (Net income/Sales)
POR: Payout ratio (Dividends/Net incom