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 7% 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

Cash	$ 100.00	x 2	$    200.00
Accounts receivable	$            200.00	´   2	$    400.00
Inventories	$            200.00	´   2	$    400.00
Net fixed assets	$            500.00	0	$    500.00
Total assets	$         1,000.00			$1,500.00
Accounts payable	$              50.00	´   2	$    100.00
Notes payable	$            150.00	150.00 + 360.00	$    510.00
Accruals	$              50.00	´   2   =	$    100.00
Long-term debt	$            400.00		$    400.00
Common stock	$            100.00		$    100.00
Retained earnings	$            250.00	40	$    290.00
Total liabilities and equity	$               1,000.00			$ 1,500.00
AFN				$360.00

Capacity sales = Sales/0.5 = $1,000/0.5 = $2,000.
Target FA/S ratio = $500/$2,000 = 0.25.
Target FA = 0.25($2,000) = $500 = Required FA. Since the firm currently has $500 of fixed assets, no new fixed assets will be required.
Addition to RE = M(S1)(1 - Payout ratio) = 0.05($2,000)(0.4) = $40.