Question

Problem 12-02
AFN equation

Broussard Skateboard's sales are expected to increase by 20% from $8.4 million in 2016 to $10.08 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 5%, and the forecasted payout ratio is 75%. 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 than or lower than or equal toItem than Broussard's; therefore, the identical firm is -Select -less or more or the sameItem capital intensive - it would require -Select-a smaller or a larger or the sameItem increase in total assets to support the increase in sales.

Answer 1

Sales expected in 2017 = $10,080,000

After-tax profit margin ($10,080,000*5%) = $504,000

Dividend payments [$504,000*75%] = $378,000

Addition to retained earnings [$504,000 - $378,000] = $126,000

Note: All the profits after the payment of dividend will be an addition to retained earnings.

As the assets are already at full capacity, all the assets should grow at the sales rate. It is to be noted that if the assets were not at full capacity, only the spontaneous assets would increase.

Increase in assets = $4,000,000*15% =  $600,000

Increase in liabilities = [$450,000+$450,000]*15% = $135,000

Note: For current liabilities, only the accounts payable and accruals are treated as spontaneous liabilities. Notes payable is not considered spontaneous for AFN calculation.

AFN = Increase in assets - Increase in liabilities - Addition to retained earnings

= ( $600,000 - $135,000 - $126,000)

= $339,000

So, AFN is $339,000.