Working note

we have been provided with the following information

sales will rise to $550,000 next year

Spontaneous assets are 60% of sales

and spontaneous liabilities are 40% of sales

BHS has an 8% profit margin and a 40% dividend payout ratio

level of required new funds

Formula and Calculation

Additional funds needed (AFN) is calculated as the excess of required increase in assets over the increase in liabilities and increase in retained earnings.

level of required new funds =Additional funds needed = increase in assets − increase in liabilities – increase in retained earnings

Assets $ 150,000 x 60% = $ 90,000

Liablity $ 150,000 x 40% = $ 60,000

profit margin $ 150,000 x 8% = $ 12000

Retained earning   $ 12,000 x 60% = $ 7200

level of required new funds =90000-60000-7200

= $ 22,800