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BA 350 WEEK 3 ASSIGNMENT 12.3. The following equation is sometimes used to forecast financial requirements:
AFN= (A0*/S0)/(ΔS) – (L0*/S0)(ΔS) – M(S1)(1-POR)
What key assumption do we make when using this equation? Under what conditions might this assumption not hold true?
(12–5) What is meant by the term “self-supporting growth rate?” How is this rate related to the AFN equation, and how can that equation be used to calculate the self-supporting growth rate
12-3:
Refer to problem 12-1, Return to the assumption that the company had $3 million in assets at the end of 2010, but now assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Why is this AFN different from the one you found in problem 12-1?
12-5
At year-end 2010, Bertin Inc.’s total assets were $1.2 million and its accounts payable were $375,000. Sales, which in 2010 were $2.5 million, are expected to increase by 25% in 2011. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Bertin typically uses no current liabilities other than accounts payable. Common stock amounted to $425,000 in 2010, and retained earnings were $295,000. Bertin has arranged to sell $75,000 of new common stock in 2011 to meet some of its financing needs. The remainder of its financing needs will be met by issuing new long-term debt at the end of 2011. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its profit margin on sales is 6%, and 40% of earnings will be paid out as dividends.
a. What were Bertin’s total long-term debt and total liabilities in 2010?
b. How much new long-term debt financing will be needed in 2011?
(Hint: AFN − New stock = New long-term debt.)
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