Question

Broussard Skateboard's sales are expected to increase by 25% from $8.6 million in 2016 to $10.75 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 6%, and the forecasted payout ratio is 55%. What would be the additional funds needed? Do not round intermediate calculations. Round your answer to the nearest dollar.

Answer 1

2016:

Sales = $8,600,000
Total Assets = $4,000,000

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

2017:

Sales = $10,750,000

Net Income = Sales * Profit Margin
Net Income = $10,750,000 * 6%
Net Income = $645,000

Addition to Retained Earnings = Net Income * (1 - Payout Ratio)
Addition to Retained Earnings = $645,000 * (1 - 0.55)
Addition to Retained Earnings = $290,250

Increase in Total Assets = Total Assets, 2016 * Growth Rate
Increase in Total Assets = $4,000,000 * 25%
Increase in Total Assets = $1,000,000

Increase in Spontaneous Current Liabilities = Spontaneous Current Liabilities, 2016 * Growth Rate
Increase in Spontaneous Current Liabilities = $900,000 * 25%
Increase in Spontaneous Current Liabilities = $225,000

Additional Funds Needed = Increase in Total Assets - Addition to Retained Earnings - Increase in Spontaneous Current Liabilities
Additional Funds Needed = $1,000,000 - $290,250 - $225,000
Additional Funds Needed = $484,750