Question

Broussard Skateboard's sales are expected to increase by 20% from $8.4 million in 2016 to $10.08 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 55%. What would be the additional funds needed? Do not round intermediate calculations. Round your answer to the nearest dollar.
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Answer 1

Since assets need to increase at the same rate as projected sales, Asset must also increase by 20%. So $4 million in 2016 will increase to $4*1.2 = $4.8 million in 2017. So $0.8 million funds are required for the assets to grow to $4.8 million (from $4 million)

Sales in 2017 are $10.08 million

After tax profit = 5% of sales = 5%*10.08 = $0.504 million. Payout ratio is 55%. So Money left after paying out is 45%*0.504 = $0.2268 million. Add to this, the accruals from the year.

Total funds available = 0.45 (accruals) + 0.2268 million = $0.6768 million

Thus, additional funds required = $0.8 - $0.6768 = $0.1232 million or $123,200