Sub: Finance Topic: Financial Forecasting
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Additional Funds Needed Method
Most companies expect growth in sales, which means its assets also must grow. Asset growth requires additional funds, so the firm may have to raise additionalexternal capital if it has insufficient internal funds. If we assume that none of the
firm’s ratios will change, we can use a sim
ple approach, the Additional FundsNeeded (AFN) method, to forecast financial requirements.
Required Increase in Assets
In a steady-state situation in which no excess capacity exists, the firm musthave additional plant and equipment, more delivery trucks, higherinventories, and so forth if sales are to increase. In addition, more sales will lead to more accounts receivable, and those receivables must befinanced from the time of the sale until they are collected. Therefore, bothfixed and current assets must increase if sales are to increase. Of course, if assets are to increase, liabilities and equity must also increase by a likeamount to make the balance sheet balance.
The first sources of expansion funding are the “spontaneous” increasesthat will occur in a company’s accounts payable and accrued wages andtaxes. The company’s suppliers give it 10 days to pay for inventory