Additional Funding Needed (AFN) or External Funding Needed formula

Data Needed for Calculations

ACME Roadrunner Eradication Inc. Income Statement as of December 31, 2010 (in thousands) Sales $2,350.00 COGS $1,997.50 EBITDA $352.50 Dep. Expense $58.75 S&A Expense $131.60 EBIT $162.15 Interest Expense $19.13 EBT $143.03 Taxes $57.21 Net Income $85.82 Dividends Paid $35.82 Addition to R/E $50.00

ACME Roadrunner Eradication Inc. Balance Sheet as of December 31, 2010 ASSETS 2010 Current Assets Cash $105.75 Acct. Receivable $223.25 Inventory $364.25 Prepaid Expenses $47.00 Total Current Assets $740.25 Long Term (Fixed Assets) Gross Fixed Assets (PPE) $1,163.25 Less Accumulated Depreciation $293.75 Net Fixed Assets $869.50 Total Assets $1,609.75 LIABILITIES AND EQUITY LIABILITIES Current Liabilities Acct. Payable $293.75 Accrued Liabilities $146.00 Notes Payable $175.00 Total Current Liabilities $614.75 Long Term Liabilities Loans Bonds $120.00 Mortgages $0.00 Total Long Term Liabilities $120.00 Total Liabilities $734.75 EQUITY Preferred Stock $0.00 Common Stock $400.00 Paid in Capital Surplus $175.00 Retained Earnings $300.00 Less Treasury Stock $0.00 Total Equity $875.00 TOTAL LIABILITIES AND EQUITY $1,609.75

This lesson is to teach you to find AFN. The additional funds needed formula is a quick and dirty way to determine what funding needs will be. The formula is: AFN = [A*/S0] * (change in sales) - [L*/S0]*(change in sales) - NPM*(1-D)*Sn A* = The dollar amount of assets that change with sales. Spontaneous means changes with sales. If a firm is at 100% capacity, all assets are spontaneous. If a firm is at less than 100% capacity, the spontaneous assets are usually all current assets not including prepaid expenses. These do not change with sales. L* = Spontaneous liabilities are those liabilities that change with sales generally only A/P and accrued expenses. S0 = The original sales amount Sn = New sales amount after growth. Sn = S0*(1 + growth rate in sales) NPM = net profit margin = net income/sales. These numbers come from the original income statement. 1-D = retention ratio or 1 - dividend payout ratio D= dividends paid/net income.

AFN = total assets - total liabilities and equity following the calculation of a proforma statement. An estimate of this amount can be found using a shortcut called the AFN formula. AFN may be positive or negative. A positive number means that new assets are greater than the new financing generated. The firm will need to borrow money or sell stock. This is called a deficit although the number is positive. To adjust for this, additions are made to notes payable, loans, bonds or stocks. A negative number means that new assets are less than the new financing generated. The firm has over borrowed. This is called a surplus. Generally, the surplus is added to cash to adjust the balance sheet. Occassionally, the surplus is adjusted by reducing Notes payable or loans.

Suppose Blink and Nod Eye Wear, Inc. calculated its AFN to be -5,000,000. What does this mean and how should it be accounted for on the proforma statements?

A. Surplus - the firm over borrowed and should add the surplus to the cash account.

B. Surplus - the firm over borrowed and should add the surplus to the notes payable

C. Deficit - the firm needs to borrow and should add the deficit to notes payable or loans.