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Date Posted: 08:48:42 02/11/02 Mon
Author: Dr. D.
Subject: OFN Formula - pg 162
In reply to: Marilyn Whittaker 's message, "question for Mr D" on 16:53:43 02/09/02 Sat

I'll take these in order
>why is the formula for external funds different on
>page 162?

While the notation is a bit different than in class, it's actually getting to the exact same place. LEt's take a part at a time

The first term: "TA(o)(g)" is the change in Total Assets

The next term "L(o)(g) is the change in spontaneous liabilities

The third term may be where the confusion is.
"S(o) + S(o)(g)" is the projected next year's sales. This is mathematically equivalent to [S(o)(1 +g)]

Projected next year's sales times NPM gives you projected Net Income

Net Income Less Dividends Paid give you addition to retained earnings


>and on chapter 5 question 4, I keep coming up with 45%
>on the last credit term not 60%.

You are correct. THe book is in error. However, as noted in class, the exact answer is (5/95) x 360/(60-20) = 47.36%. The 45% is based on 5% cost per "round trip", while the actual cost is $5 on a base of $95, or 5.27% per 40 days.

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