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AFN Formula and Forecasted Debt Answer: e Diff: M

The document provides the balance sheet for Jackson Co. as of December 31, 2002 showing total assets of $1,000,000 and total liabilities and equity of $1,000,000. In 2002, the company reported $5 million in sales, $100,000 in net income, and $60,000 in dividends. The company anticipates 20% sales growth in 2003 and maintaining its 60% dividend payout ratio. Assuming full capacity and proportional increases in assets and liabilities, how much long-term debt will the company need to issue in 2003 using the AFN formula?

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499 views1 page

AFN Formula and Forecasted Debt Answer: e Diff: M

The document provides the balance sheet for Jackson Co. as of December 31, 2002 showing total assets of $1,000,000 and total liabilities and equity of $1,000,000. In 2002, the company reported $5 million in sales, $100,000 in net income, and $60,000 in dividends. The company anticipates 20% sales growth in 2003 and maintaining its 60% dividend payout ratio. Assuming full capacity and proportional increases in assets and liabilities, how much long-term debt will the company need to issue in 2003 using the AFN formula?

Uploaded by

Kaye Javellana
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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AFN formula and forecasted debt Answer: e Diff: M

28. Jackson Co. has the following balance sheet as of December 31, 2002.

Current assets $ 600,000 Accounts payable $ 100,000


Fixed assets 400,000 Accrued liabilities 100,000
Notes payable 100,000
Long-term debt 300,000
Total common equity 400,000
Total liabilities
Total assets $1,000,000 and equity $1,000,000

In 2002, the company reported sales of $5 million, net income of $100,000,


and dividends of $60,000. The company anticipates its sales will increase
20 percent in 2003 and its dividend payout will remain at 60 percent.
Assume the company is at full capacity, so its assets and spontaneous
liabilities will increase proportionately with an increase in sales.

Assume the company uses the AFN formula and all additional funds needed
(AFN) will come from issuing new long-term debt. Given its forecast, how
much long-term debt will the company have to issue in 2003?

a. $ 12,000
b. $ 60,000
c. $ 88,000
d. $ 92,000
e. $112,000

Expected growth rate Answer: d Diff: M


29. Apex Roofing Inc. has the following balance sheet (in millions of dollars):

Current assets $3.0 Accounts payable $1.2


Net fixed assets 4.0 Notes payable 0.8
Accrued wages and taxes 0.3
Long-term debt 1.2
Common equity 1.5
Retained earnings 2.0
Total liabilities
Total assets $7.0 and equity $7.0

Last year’s sales were $10 million, and Apex estimates it will need to raise
$2 million in new debt and equity next year. You have identified the
following facts: (1) it pays out 30 percent of earnings as dividends; (2) a
profit margin of 4 percent is projected; (3) fixed assets were used to full
capacity; and (4) assets and spontaneous liabilities as shown on last year’s
balance sheet are expected to grow proportionally with sales. If the above
assumptions hold, what sales growth rate is the firm anticipating? (Hint:
You can use the AFN formula to help answer this problem.)

a. 187%
b. 51%
c. 97%
d. 44%
e. 26%

Chapter 17 - Page 11

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