A Part 5 Corporate Valuation and Governance Easy Problems 1- ✓ Solved

· Updated on December 8, 2025

Forecast Broussard's additional funds needed using the AFN equation based on a sales increase of 15% from $8 million to $9.2 million. Asset growth should match sales growth since the company operates at full capacity. Adjustments include initial assets of $5 million at the end of 2013, current liabilities totaling $1.4 million, profit margin of 50%, and payout ratio of 40%. Calculate the AFN for these conditions and compare it with the scenario where year-end assets are $7 million. Explain why the AFN differs between these scenarios and whether the company's capital intensity ratio remains the same. Next, assume no dividends are paid, and determine the resulting AFN, explaining the difference from previous calculations.

Determine the self-supporting growth rate for Maggie’s Muffins, based on sales of $5 million, assets of $2.5 million, and current liabilities of $1 million. With a profit margin of 7% and an 80% payout ratio, compute the maximum sales increase without external financing.

Calculate Wallace Landscaping’s total long-term debt and liabilities in 2013; forecast the 2014 financing needs assuming a 35% sales increase, proportional relationships between assets and liabilities, and planned equity and debt issuance. Highlight how these figures relate to the AFN approach.

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Financial planning and forecasting play a crucial role in ensuring the sustainable growth of a company. Using the Additional Funds Needed (AFN) model, companies can estimate their funding requirements based on sales forecasts and operational parameters. This model provides valuable insights into how sales growth, asset management, and financing decisions intertwine to support expansion plans.

Broussard Skateboard's scenario exemplifies the application of AFN in real-world forecasting. With an expected sales increase of 15%, the company’s current assets, liabilities, profit margins, and payout ratios influence the additional funds needed. Given the assets at $5 million and the company operating at full capacity, assets must grow proportionally to sales. The AFN formula considers the increase in total assets required to support sales growth minus spontaneous liabilities and retained earnings. In the initial scenario, the calculations indicate that Broussard needs approximately $1.035 million in external funds to sustain its growth.

If the company's year-end assets are taken as $7 million, the AFN increases because the baseline asset level is higher, leading to a larger funding gap—around $2.045 million. This difference stems from the fact that higher starting assets imply a larger asset base supporting sales, thereby increasing the additional assets (and thus funding) needed. The capital intensity ratio, which measures assets per dollar of sales, is different in this case, indicating a change in asset efficiency or operational structure.

Assuming Broussard pays no dividends, retained earnings increase by the after-tax profit, affecting the internal financing available. With no dividends payout, more retained earnings are available to finance growth, reducing external funding needs. This change illustrates how dividend policies impact corporate financing and growth sustainability.

Maggie’s Muffins demonstrates the concept of self-supporting growth rate, which reflects the maximum growth rate a firm can attain without external financing, given its current profitability, payout ratio, and spontaneous liabilities. The calculation involves estimating the retained earnings as a percentage of sales, then relating these to total assets to determine the sustainable growth. For Maggie’s, the self-supporting growth rate is approximately 16.4%, indicating the company can increase sales by this percentage internally without needing external funds.

Wallace Landscaping’s financing needs are analyzed by calculating total assets and liabilities in the base year and projecting these forward with proportional relationships. A 35% sales increase results in higher total assets and spontaneous liabilities, all proportional to sales. The total financing requirement is then offset by planned equity issuance and new debt, with the latter determined by subtracting the equity raised from overall financing needs. This process exemplifies how the AFN model guides financial decision-making amid projected growth.

In summary, the AFN methodology provides a systematic framework for assessing future funding requirements, guiding strategic decisions on asset management, dividend policies, and financing structure. Variations in initial asset levels, dividend payout policies, and assumptions about spontaneous liabilities significantly impact the estimates, emphasizing the importance of nuanced financial planning.

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