Question

Broussard Skateboard's sales are expected to increase by 25% from $7.8 million in 2016 to $9.75 million in 2017. Its assets totaled $2 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 7%, and the forecasted payout ratio is 75%. Use the AFN equation to forecast Broussard's additional funds needed for the coming year. Round your answer to the nearest dollar. Do not round intermediate calculations.

Answer 1

The additional funds needed (AFN) equation is given by:
AFN=Increase in Assets-Spontaneous increase in liabilities-New sales*Profit margin*(1 - Payout ratio)
For the given question, we will have:
Additional funds needed=Increase in Assets-(Increase in accounts payable+Increase in accruals)-New sales*Profit margin*(1-Payout ratio)
Here, spontaneous increase in liabilities=Increase in accounts payable+Increase in accruals

Given that the assets must grow at the same rate as projected sales and sales are expected to increase at a rate of 25%.

Given that, at the end of 2016 assets totaled $2 million= $2*1000000=$2000000
Broussard is already at full capacity, so its assets must grow at the same rate as projected sales.

So, increase in Assets=$2000000*25%=$500000

Accounts payable=$450,000
Increase in accounts payable=$450,000*25%=$112500

Accruals=$450,000
Increase in accruals=$450,000*25%=$112500

New sales=$9.75 million=$9.75*1000000=$9750000
Profit margin=7% =.07
Payout ratio is 75% =.75

Substituting the values in the equation below we get:
Additional funds needed=Increase in Assets-(Increase in accounts payable+Increase in accruals)-New sales*Profit margin*(1-Payout ratio)
Additional funds needed=$500000-($112500+$112500)-$9750000*.07(1-.75)
=$500000-($225000)-$9750000*.07(0.25)
=$500000-$225000-$170625
=$104375
So, AFN=$104375