Question

Broussard Skateboard's sales are expected to increase by 25% from $7.8 million in 2018 to $9.75 million in 2019. Its assets totaled $5 million at the end of 2018. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2018, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 3%, and the forecasted payout ratio is 65%. Use the AFN equation to forecast Broussard's additional funds needed for the coming year. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as $1,200,000. Do not round intermediate calculations. Round your answer to the nearest dollar.

Answer 1

Formula for Additional funds Needed:-

AFN = (Last year's Total Assets/Last Year's Sales)*Change in sales - (Last Year's Spontaneous Liab/Last Year's Sales)*Change in sales - [Forecasted sales*After-Tax Profit Margin*(1-Payout Ratio]

where, Change in Sales = $9.75M - $7.8M = $1.95 million

Last Year's Sales= $7.8 million

Forecasted sales = $9.75 Million

Last year's Total Assets = $5 million

Spontaneous Liab = Accounts Payable + Accured Liabilities (notes Payable are not part of Spontaneous Liab)

= $450,000 + $450,000 = $900,000

After-Tax Profit Margin = 3%

Payout Ratio = 65%

AFN = ($5 million/$7.8 million)*$1.95 million - ($0.9 million/$7.8 million)*$1.95 million - [$9.75 million*3%*(1-0.65)]

AFN = $1250,000 - $225,000 - $102,375

AFN = $922,625

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