Question

AFN equation

Broussard Skateboard's sales are expected to increase by 25% from $7.6 million in 2016 to $9.50 million in 2017. Its assets totaled $4 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 4%, and the forecasted payout ratio is 60%. What would be the additional funds needed? Do not round intermediate calculations. Round your answer to the nearest dollar.
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Assume that an otherwise identical firm had $5 million in total assets at the end of 2016. The identical firm's capital intensity ratio (A₀*/S₀) is -Select-higher thanlower thanequal toItem 2  than Broussard's; therefore, the identical firm is -Select-lessmorethe sameItem 3 capital intensive - it would require -Select-a smallera largerthe sameItem 4  increase in total assets to support the increase in sales.

Answer 1

AFN Equation:

2016 Sales = $ 7.6 million and 2017 Sales = $ 9.5 million, Increase in Sales = 25 %

Assets in 2016 = $ 4 million

Assets in 2017 = 4 x 1.25 = $ 5 million

Current Liabilities 2016 = $ 1.4 million, Accounts Payable = $450000, Notes Payable = $ 500000, Accruals = $ 450000,

Notes Payable is a short-term financing instrument and hence its level is not influenced by an increase in sales. Only accruals and accounts payable will be impacted by sales increment.

Accounts Payable 2017 = 450000 x 1.25 = $ 562500 and Accruals 2017 = 450000 x 1.25 = $ 562500

Current Liabilities 2017 = 562500 + 500000 + 562500 = $ 1625000 or $ 1.625 million

Long-Term Liabilities + Equity + Retained Earnings = T = Assets - Current Liabilities = 4 - 1.4 = $ 2.6 million

Sales 2017 = $ 9.5 million and After-Tax Profit Margin = 4%

Net Income 2017 = 0.04 x 9.5 = $ 0.38 million

Dividend Payout = 60%

Dividend Paid = 0.6 x 0.38 = $ 0.228 million

Increase in Retained Earnings = Net Income - Dividend Paid = 0.38 - 0.228 = $ 0.152 million

Additional Financing Needed = Assets 2017 - Current Liabilities 2017 - T - Increase in Retained Earnings = 5 - 1.625 - 2.6 - 0.152 = $ 0.623 million or $ 623000

NOTE: Please raise a separate query for the solution to the second unrelated question, as one query is restricted to the solution of only one complete question with up to four sub-parts.