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AFN Model
A crude model to estimate external funds needed to support Sales
after accounting for internally generated and automatically generated
sources of funds.
Assumptions:
1. Firm is operating at full capacity
2. Each type of asset grows proportionally w/ sales
3. Spontaneously generated liabilities grow proportionally w/ Sales.
4. Profit margin (M) is constant
5. Firm can accurately forecast in Sales.
AFN
= Required - in Spontaneous
in Assets
Liabilities
AFN = (A*/S0) S -
(L*/S0) S
- in RE
where:
A* = assets required to support sales
S0= Sales last year
S = in Sales = S1 - S0
L* = in Spontaneous Liabilities
M = Profit Margin = NI/ Sales profit per $ of Sales
RR= Retention Ratio
S1= S0 + S
Notes:
1. A*/S0 = capital intensity ratio
= required $s of assets for every $ in Sales
A*/S0 AFN
Why?
3. M AFN
Why?
4. RR AFN
Why?
Ex:
2009 Balance Sheet (Millions of $)
Key Assumptions:
Operating at full capacity in 2009.
Each type of asset grows proportionally with sales.
Account Payables and accruals grow proportionally with sales.
2009 profit margin and payout will be maintained.
h. Find AFN:
10
2010 Proj.
COGS/Sales
60%
60%
SGA/Sales
35%
35%
Cash/Sales
1%
1%
Acct. rec./Sales
12%
12%
Inv./Sales
12%
12%
Net FA/Sales
25%
25%
AP & accr./Sales
5%
5%
Other Inputs
Percent growth in sales
25%
1.25
10%
Tax rate
40%
40%
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Calculations
Sales
1.25 Sales09 =
$2,500.0
Less: COGS
60% Sales10 =
1,500.0
35% Sales10 =
875.0
SGA
EBIT
Interest
$125.0
0.1(Debt09) =
20.0
EBT
$105.0
Taxes (40%)
42.0
Net Income
$63.0
Div. (40%)
$25.2
Add to RE
$37.8
2010
Cash
1% Sales10 =
$25.0
Accts Rec.
12%Sales10 =
300.0
Inventories
12%Sales10 =
300.0
Total CA
Net FA
Total Assets
$625.0
25% Sales10 =
625.0
$1,250.0
12
100
5% Sales10 =
$125.0
Carried over
100.0
Total CL
$225.0
L-T debt
100
Carried over
100.0
Common stk
500
Carried over
500.0
Ret earnings
200
+37.8*
237.8
Total claims
$1,062.8
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AFN
With AFN
AP accruals
$125.0
$125.0
Notes payable
100.0
Total CL
$225.0
L-T Debt
100.0
Common stk
500.0
500.0
Ret earnings
237.8
237.8
Total claims
$1,071.0
$1250.0
+93.6
193.6
$318.6
+93.6
193.6
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Excess Capacity
Note: Excess capacity lowers AFN.
Economies of Scale
Recall from ECN 250 economies of scale
1. marginal costs associated with increasing output
2. 'ing additions to output associated with increasing assets.
Note: this indicates that increased sales will not require
proportional increase in assets.
Lumpy Assets
In many industries, fixed assets are added in large discrete units.
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