Question

The Booth Company's sales are forecasted to double from $1,000 in 2016 to $2,000 in 2017. Here is the December 31, 2016, balance sheet: Cash $  100 Accounts payable $   50 Accounts receivable 200 Notes payable 150 Inventories 200 Accruals 50 Net fixed assets 500 Long-term debt 400 Common stock 100 Retained earnings 250 Total assets $1000 Total liabilities and equity $1000 Booth's fixed assets were used to only 50% of capacity during 2016, but its current assets were at their proper levels in relation to sales. All assets except fixed assets must increase at the same rate as sales, and fixed assets would also have to increase at the same rate if the current excess capacity did not exist. Booth's after-tax profit margin is forecasted to be 6% and its payout ratio to be 55%. What is Booth's additional funds needed (AFN) for the coming year? Round your answer to the nearest dollar. $

Answer 1

All the assets except fixed assets increases in proportion to sales. The pro forma balance sheet would be as follows
Booth Company
Pro forma balance sheet as on 2017
Cash (100*2)	200	Accounts payable (50*2)	100
Accounts receivable (200*2)	400	Notes payable	150
Inventories (200*2)	400	Accruals (50*2)	100
Net fixed assets	500	Long-term debt	400
		Common stock	100
		Retained earnings	304
Total assets	1500	Total liabilities and equity	1154
The additional fund needed = (1500-1154)		346
Ending balance of retained earnings = Retained earnings beginning balance + net income of current year - dividend paid
Ending balance of retained earnings = 250 + (2000*6%) - (2000*6%*55%)
Ending balance of retained earnings = 250 + 120 - 66
Ending balance of retained earnings	304
Sales at full capacity = 1000/0.50	2000
Target FA to sales ratio = 500/2000	0.25
Target FA = 2000*0.25	500
Since the company already has fixed assets of 500, there are no addition needed