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

Cold Duck Manufacturing Inc. reported sales of $743,000 at the end of last year; but this year, sales are expected to grow by 7%. Cold Duck expects to maintain its current profit margin of 20% and dividend payout ratio of 10%. The firms total assets equaled $450,000 and were operated at full capacity. Cold Ducks balance sheet shows the following current liabilities: accounts payable of $75,000, notes payable of $35,000, and accrued liabilities of $70,000. Based on the AFN (Additional Funds Needed) equation, what is the firms AFN for the coming year?

-$152,190

-$121,752

-$146,102

-$133,927

A negatively-signed AFN value represents:

A shortage of internally generated funds that must be raised outside the company to finance the companys forecasted future growth.

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

A point at which the funds generated within the firm equal the demands for funds to finance the firms future expected sales requirements.

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

60.6%

77.9%

86.6%

69.3%