Question

Additional Funds Needed

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 40%. What is Booth's additional funds needed (AFN) for the coming year? Round your answer to the nearest dollar.

$

Answer 1

We need to first analyse the Income Statament of Booth

Booths Income Statements
	Current	Forecasted
Sales (A)	1000	2000
PAT (B= 6% of A)	60	120
Dividend (C=40% of B)	24	48
Addition to Retained Earnings (D= B-C)	36	72

(Alll amounts are mentioned in $)

Now given that due to sales increase, the current Assets would also grow at the same rate. Needless to say, the same impact would also be reflected on accruals and accounts payable. However there will be no change on company's fixed assets.

Booths Balance Sheet
Assets	Current	Forecasted
Accounts Receivable	200	400
Cash	100	200
Inventories	200	400
Net Fixed Assets	500	500
Total Assets	1000	1500
Liabilities	Current	Forecasted
Accounts Payable	50	100
Notes Payable	150	150
Accruals	50	100
Long Term Debt	400	400
Common Stock	100	428 **
Retained Earnings	250	322
Total Liabilities	1000	1500
**Balancing Figure

Computation of Additional Funds required.

Total Increase in Assets = $1500-$1000

=$500

Now this Increase in Financed by Increase in Notes Payable, Accruals and Retained Earnings. For Remaining increase additional Funds are Required.

Therefore AFN=$500 - $50 (Increase in Accruals) - $50 (Increase in Accounts Payable) - $72 (Increase in Retained Earnings)

=$328

This can also be computed by calculting the change in equity = Forecasted Equity - Current Equity = $328.