Question

AFN Equation

Broussard Skateboard's sales are expected to increase by 15% from $7.4 million in 2016 to $8.51 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.
$

Why is this AFN different from the one when the company pays dividends?
I. Under this scenario the company would have a higher level of retained earnings but this would have no effect on the amount of additional funds needed.
II. Under this scenario the company would have a lower level of retained earnings which would reduce the amount of additional funds needed.
III. Under this scenario the company would have a lower level of retained earnings but this would have no effect on the amount of additional funds needed.
IV. Under this scenario the company would have a higher level of retained earnings which would reduce the amount of additional funds needed.
V. Under this scenario the company would have a higher level of retained earnings which would increase the amount of additional funds needed.
-Select-IIIIIIIVV

Answer 1

Answer to Part A:

2016:

Sales = $7,400,000
Total Assets = $5,000,000

Spontaneous Current Liabilities = Accounts Payable + Accruals
Spontaneous Current Liabilities = $450,000 + $450,000
Spontaneous Current Liabilities = $900,000

2017:

Sales = $8,510,000

Net Income = Sales * Profit Margin
Net Income = $8,510,000 * 5%
Net Income = $425,500

Addition to Retained Earnings = Net Income
Addition to Retained Earnings = $425,500

Increase in Total Assets = Total Assets, 2016 * Growth Rate
Increase in Total Assets = $5,000,000 * 15%
Increase in Total Assets = $750,000

Increase in Spontaneous Current Liabilities = Spontaneous Current Liabilities, 2016 * Growth Rate
Increase in Spontaneous Current Liabilities = $900,000 * 15%
Increase in Spontaneous Current Liabilities = $135,000

Additional Funds Needed = Increase in Total Assets - Addition to Retained Earnings - Increase in Spontaneous Current Liabilities
Additional Funds Needed = $750,000 - $425,500 - $135,000
Additional Funds Needed = $189,500

Answer to Part B:

Under this scenario the company would have a higher level of retained earnings which would reduce the amount of additional funds needed.