In: Finance
AFN equation
Broussard Skateboard's sales are expected to increase by 20%
from $8.6 million in 2018 to $10.32 million in 2019. Its assets
totaled $4 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 5%, 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.
$
Additional Funds Needed [AFN] for the coming year
Expected Next Year Sales = $10,320,000
After Tax profit Margin
After Tax profit Margin = Expected Next Year Sales x Profit Margin
= $10,320,000 x 5.00%
= $516,000
Dividend Pay-out
Dividend Pay-out = After Tax profit Margin x Dividend Pay-out Ratio
= $516,000 x 60%
= $309,600
Additions to Retained Earnings
Additions to Retained Earnings = After Tax profit Margin - Dividend Pay-out
= $516,000 - $309,600
= $206,400
Increase in Total Assets
Increase in Total Assets = Total Assets x Percentage of Increase in sales
= $4,000,000 x 20%
= $800,000
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
= $800,000 - $180,000 - $206,400
= $413,600
“Hence, the Additional Funds Needed (AFN) will be $413,600”