Question

Sales are expected to increase by 25% from $8.4 million in 2016 to $10.50 million in 2017. Its assets totaled $5 million at the end of 2016. The Company 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?

Answer 1

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

Net Income = Sales * After-tax Profit Margin = $10,500,000 * 0.05 = $525,000

Addition to Retained Earnings = Net Income * (1 - Payout Ratio) = $525,000 * (1 - 0) = $525,000

Increase in Total Assets = 25% * $5,000,000 = $1,250,000

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

Additional Funds Needed = Increase in Total Assets - Increase in Spontaneous Current Liabilities - Addition to Retained Earnings

Additional Funds Needed = $1,250,000 - $225,000 - $525,000

Additional Funds Needed = $500,000