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 $4 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 5%, and the forecasted payout ratio is 70%. 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

Answer:

Increase in Assets = Assets * Sales Growth Rate
Increase in Assets = $4,000,000 * 20%
Increase in Assets = $800,000

Spontaneous Increase in Liabilities = Spontaneous Current Liabilities * Sales Growth Rate
Spontaneous Current Liabilities = Accounts Payable + Accruals
Spontaneous Current Liabilities = $450,000 + $450,000
Spontaneous Current Liabilities = $900,000

Spontaneous Increase in Liabilities = $900,000 * 20%
Spontaneous Increase in Liabilities = $180,000

Projected Sales = $9,120,000
After Tax Profit Margin = 5%
After Tax Profit = $9,120,000 * 5% = $456,000
Dividend Payment = $456,000 * 70% = $319,200
Addition to Retained Earnings = $456,000 - $319,200
Addition to Retained Earnings = $136,800

Additional Fund Needed (AFN) = Increase in Assets – Spontaneous Increase in Liabilities – Addition to Retained Earnings
Additional Fund Needed (AFN) = $800,000 - $180,000 - $136,800
Additional Fund Needed (AFN) = $483,200