3. More on the AFN (Additional Funds Needed) equation

Blue Elk Manufacturing reported sales of $890,000 at the end of last year, but this year, sales are expected to grow by 9%. Blue Elk expects to maintain its current profit margin of 23% and dividend payout ratio of 20%. The following information was taken from Blue Elk's balance sheet:

Total assets:$425,000

Accounts payable:$60,000

Notes payable:$35,000

Accrued liabilities:$70,000

QUESTION:

Based on the AFN equation, the firm's AFN for the current year is

A. -$197,532

B. -$151,948

C. -$159,545

D. -$136,753

QUESTION: A positively signed AFN value represents:

A. a surplus of internally generated funds that can be invested in physical or financial assets or paid out as additional dividends.

B. a shortage of internally generated funds that must be raised outside the company to finance the company's forecasted future growth.

C. a point at which the funds generated within the firm equal the demands for funds to finance the firm's future expected sales requirements.

QUESTION:

Because of its excess funds, Blue Elk Manufacturing is thinking about raising its dividend payout ratio to satisfy shareholders. Blue Elk could pay out ? of its earnings to shareholders without needing to raise any external capital. (Hint: What can Blue Elk increase its dividend payout ratio to before the AFN becomes positive?)

A. 70.5%

B. 74.9%

C. 88.1%

D. 79.3%