Question

Problem 12-1
AFN equation

Broussard Skateboard's sales are expected to increase by 15% from $9.0 million in 2016 to $10.35 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 5%, 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 AFN formula is as under,

Additional funds needed (AFN) = Increase in Assets - Increase in spontaneous liabilities - Increase in retained earnings

Increase in Assets = 2016 Assets x sales growth % = $30,00,000 x 15% = $4,50,000

Increase in spontaneous liabilities = (2016 Accounts Payable + 2016 accruals) x Sales growth % = ($450000 + $450000) x 15% = $1,35,000

Increase in retained earnings = 2017 Sales x After tax profit margin % x (1 - forecasted payout ratio)

Increase in retained earnings = $10,350,000 x 5% x (1 - 0.75) = $1,29,375

Additional funds needed (AFN) = $4,50,000 - $1,35,000 - $1,29,375

Additional funds needed (AFN) = $1,85,625

Broussard's additional funds needed for the coming year = $1,85,625