Question

Beasley Industries' sales are expected to increase from $5 million in 2017 to $6 million in 2018, or by 20%. Its assets totaled $3 million at the end of 2017. Beasley is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2017, current liabilities are $800,000, consisting of $170,000 of accounts payable, $350,000 of notes payable, and $280,000 of accrued liabilities. Its profit margin is forecasted to be 4%, and its dividend payout ratio is 60%.

Using the AFN equation, forecast the additional funds Beasley will need for the coming year. Do not round intermediate calculations. Enter your answer in dollars. For example, an answer of $2 million should be entered as 2,000,000. Round your answer to the nearest dollar. AFN = (A₀^*/S₀)ΔS - (L₀^*/S₀)ΔS - (M)(S₁)(1 - Payout ratio)

Answer 1

2017:

Sales = $5,000,000
Total Assets = $3,000,000
Profit Margin = 4.00%

Retention Ratio = 1 - Payout Ratio
Retention Ratio = 1 - 0.60
Retention Ratio = 0.40

Spontaneous Current Liabilities = Accounts Payable + Accruals
Spontaneous Current Liabilities = $170,000 + $280,000
Spontaneous Current Liabilities = $450,000

2018:

Sales = $6,000,000

Addition to Retained Earnings = Sales * Profit Margin * Retention Ratio
Addition to Retained Earnings = $6,000,000 * 4.00% * 0.40
Addition to Retained Earnings = $96,000

Increase in Total Assets = $3,000,000 * 0.20
Increase in Total Assets = $600,000

Increase in Spontaneous Current Liabilities = $450,000 * 0.20
Increase in Spontaneous Current Liabilities = $90,000

Additional Fund Needed = Increase in Total Assets - Increase in Spontaneous Current Liabilities - Addition to Retained Earnings
Additional Fund Needed = $600,000 - $90,000 - $96,000
Additional Fund Needed = $414,000