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solution

You have been asked to forecast the additional funds needed (AFN) for Houston, Hargrove, & Worthington (HHW), which is planning its operation for the coming year. The firm is operating at full capacity. Data for use in the forecast are shown below. However, the CEO is concerned about the impact of a change in the payout ratio from the 10% that was used in the past to 80%, which the firm’s investment bankers have recommended. Based on the AFN equation, by how much would the AFN for the coming year change if HHW increased the payout from 10% to the new and higher level? All dollars are in millions.

  • Last year’s sales S0 = $300.00
  • Last year’s accounts payable = $50.00
  • Sales growth rate g = 40%
  • Last year’s notes payable = $15.00
  • Last year’s total assets A0* = $500
  • Last year’s accruals = $20.00
  • Last year’s profit margin PM = 20.0%
  • Initial payout ratio = 10.0%

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