Question

Broussard Skateboard's sales are expected to increase by 20% from $7.6 million in 2016 to $9.12 million in 2017. Its assets totaled $3 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 4%. Assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Do not round intermediate calculations. Round your answer to the nearest dollar.

Why is this AFN different from the one when the company pays dividends?
I. Under this scenario the company would have a lower level of retained earnings but this would have no effect on the amount of additional funds needed.
II. Under this scenario the company would have a higher level of retained earnings which would reduce the amount of additional funds needed.
III. Under this scenario the company would have a higher level of retained earnings which would increase the amount of additional funds needed.
IV. Under this scenario the company would have a higher level of retained earnings but this would have no effect on the amount of additional funds needed.
V. Under this scenario the company would have a lower level of retained earnings which would reduce the amount of additional funds needed.

Answer 1

Expected sales in 2017

$9,120,000

Aftertax profit margin

$364,800

Additions to retained earnings

$364,800

Increase in assets

$600,000

3000000*20%

Increase in liabilities

$1,800,000

9000000*20%

Additional fund needed = Increase in liabilities - Addition to retained earnings - Increase in assets

Additional fund needed = 1800000 - 364800 - 600000

Additional fund needed = 1800000 - 364800 - 600000

Additional fund needed = 835,200

The additional fund needed is $835,200

The AFN would be different from the one when company pays dividends because the under this scenario the company would have higher retained earnings as dividend are not paid and therefore the additional fund needed would reduce

The correct answer is option II