Question

Broussard Skateboard's sales are expected to increase by 15% from $7.6 million in 2018 to $8.74 million in 2019. Its assets totaled $5 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 3%, and the forecasted payout ratio is 70%. What would be the additional funds needed? Do not round intermediate calculations. Round your answer to the nearest dollar.

Answer 1

Additional funds needed

= Increase in Assets - Increase in spontaneous liabilities - Increase in retained earnings

Increase in Assets:

Total Assets at the end of 2018 = $5 million

Expected growth rate = same rate of sales = 15%

Expected increase in Assets = 5 * 15% = 0.75 million

Increase in liabilities:

It is assumed that notes payable will not rise spontaneously with increase in sales, hence it is not included

Current liabilities excluding notes payable at the end of 2018

= $450000+$450000 = $900000

Expected increase in current liabilities = assumed to be the same rate as sales

= 900000*15%

= 135000 = $ 0.135 million

Increase in retained earnings:

Sales at the end of 2019 = $8.74 million

After tax profit margin = 3% = 8.74*3% =$0.2622 million

Payout ratio = 70%

Hence, retained earnings = 30%= 0.2622 * 30% = $0.07866 million

Applying values to the formula,

Additional funds needed

= 0.75 - 0.135 - 0.07866

= $0.53634 million

=$536340