Question

sales are expected to increase by 20% from $7.2 million in 2019 to $8.64 million in 2020. Its assets totaled $2 million at the end of 2019. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2019, 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 40%. Use the AFN equation to forecast Broussard's additional funds needed for the coming year. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as $1,200,000. Do not round intermediate calculations. Round your answer to the nearest dollar.

Answer 1

The first step is to determine the increase in total assets. Increase in total assets = Existing total assets * Growth rate = $2,000,000 * 20% = $400,000

The second step is to determine the increase in current liabilities. For current liabilities, only the accounts payable and accruals are treated as spontaneous liabilities. Notes payable is not considered spontaneous for additional funds needed calculation. Increase in current liabilities = (Current liabilities - Notes payable) * Growth rate = ($1,400,000 - $500,000) * 20% = $180,000

The third step is to determine the additions made to the retained earnings during the year. Additions to retained earnings = Projected Sales * Profit margin * (1 – Dividend Payout Ratio) = ($7,200,000 * 1.2) * 4% * (1 – 40%) = $207,360

The last step is to determine the additional funds needed (AFN). AFN = Increase in total assets - Increase in current liabilities - Additions to retained earnings = $400,000 - $180,000 - $207,360 = $12,640

Happy Learning!