In: Finance
Broussard Skateboard's sales are expected to increase by 20% from $9.0 million in 2016 to $10.80 million in 2017. Its assets totaled $5 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, 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 5%. Assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Do not round intermediate calculations. Round your answer to the nearest dollar.
Additional Funds Needed [AFN] for the coming year
Expected Next Year Sales = $10,800,000
After Tax profit Margin
After Tax profit Margin = Expected Next Year Sales x Profit Margin
= $10,800,000 x 5.00%
= $540,000
Additions to Retained Earnings
Here, the company is not paying any dividend for the year, therefore, the additions to the Retained Earnings will be $540,000
Increase in Total Assets
Increase in Total Assets = Total Assets x Percentage of Increase in sales
= $5,000,000 x 20%
= $1,000,000
Increase in Spontaneous liabilities
Increase in Spontaneous liabilities = [Accounts Payable + Accruals] x Percentage of Increase in sales
= [$450,000 + $450,000] x 20%
= $900,000 x 20%
= $180,000
Additional Funds Needed [AFN]
Therefore, the Additional Funds Needed [AFN] = Increase in Total Assets – Increase in in Spontaneous liabilities – Additions to retained earnings
= $1,000,000 - $180,000 - $540,000
= $280,000
“Hence, the additional funds needed for the coming year will be $280,000”