Average sales growth rate and expected sales for year 2022.

The Sales Forecast

Approx: g= 10.309
approx: sales = 3309

The need for external financing depends on the following key factors:
1. Sales growth (DS).
2. Capital intensity (A0*/S0).
3. Spontaneous liabilities-to-sales ratio (L0*/S0).
4. Profit margin (M).
5. Retention ratio (1 – Payout).
 1. Sales growth (DS). Rapidly growing companies require large increases in assets, other
things held constant.
2. Capital intensity (A0*/S0). The amount of assets required per dollar of sales, the capital
intensity ratio, has a major effect on capital requirements. Companies with high assets-
to-sales ratios require more assets for a given increase in sales, hence have a greater
need for external financing.
3. Spontaneous liabilities-to-sales ratio (L0*/S0). Companies that spontaneously generate a
large amount of funds from accounts payable and accruals have a reduced need for
external financing.
4. Profit margin (M). The higher the profit margin, the larger the net income available to
support increases in assets, hence the lower the need for external financing.
5. Retention ratio (1 – Payout). Companies that retain a high percentage of their earnings
rather than paying them out as dividends generate more retained earnings and thus need
less external financing.

Accounts payable, accrued wages, and accrued taxes increase spontaneously with sales.
Retained earnings increase, but only to the extent that dividends paid do not equal 100% of
net income and the profit margin is posiAve.
a. AFN+.

b. AFN- The firm needs less manufacturing faciliAes, raw materials, and work in
process.

c. AFN+. It reduces spontaneous funds

d. AFN +.

e. AFN +.

f. Probably AFN +. This should sAmulate sales, so it may be offset in part by

increased profits.

g. 0.

h. AFN +.
Carlsbad CorporaAon’s sales are expected to increase from $5 million in 2021 to $6 million in
2022, or by 20%. Its assets totaled $3 million at the end of 2021. Carlsbad is at full capacity,
so its assets must grow in proporAon to projected sales. At the end of 2021, current liabiliAes
are $1 million, consisAng of $250,000 of accounts payable, $500,000 of notes payable, and
$250,000 of accrued liabiliAes. Its profit margin is forecasted to be 3%, and the forecasted
retenAon raAo is 30%. Use the AFN equaAon to forecast the addiAonal funds Carlsbad will
need for the coming year.

AFN = (A0*/S0)DS – (L0*/S0)DS – MS1(1 – Payout)

æ $3,000,000 ö æ $500,000 ö
= çç ÷÷ $1,000,000 – çç ÷÷ $1,000,000 – 0.03($6,000,000)(0.3)
è $5,000,000 ø è $5,000,000 ø
= (0.6)($1,000,000) – (0.1)($1,000,000) – ($180,000)(0.3)
= $600,000 – $100,000 – $54,000
= $446,000.

Sales = $7 billion; FA = $1.944 billion; FA are operated at 90% capacity.

a. Full capacity sales = $7/0.90 = $7.77778 billion.

b. Target FA/S raAo = $1.944/$7.77778 = 0.2499 » 0.25

c. Sales increase 15%; DFA = ?

S1 = $7 billion ´ 1.15 = $8.050 billion.

No increase in Fixed assets up to $7.77778 billion.

DFA = 0.25 ´ ($8.050 billion – $7.77778 billion)

= 0.25 ´ ($0.27222 billion)
= $0.06806 billion, or approximately $68.06 million.
2021 Forecast Basis 2022
Sales $700 ´ 1.25 $875.00
OperaAng costs 500 ´ 0.70 Sales 612.50
EBIT $200 $262.50
Interest 40 40.00
EBT $160 $222.50
Taxes (25%) 40 55.625
Net income $ 120 $166.875

Dividends (33.33%) $ 40 $ 55.625

Addit. to R/E $ 80 $ 111.250

b. DDividends = ($55.625 – $40.00)/$40.00 = 39.06%.