Question

AFN Equation Broussard Skateboard's sales are expected to increase by 25% from $9.0 million in 2015 to $11.25 million in 2016. Its assets totaled $5 million at the end of 2015. Baxter is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2015, 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 4%. Assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Do not round intermediate calculations. Round your answer to the nearest dollar. $

Why is this AFN different from the one when the company pays dividends?

I. Under this scenario the company would have a higher level of retained earnings but this would have no effect on the amount of additional funds needed.

II. Under this scenario the company would have a lower level of retained earnings which would reduce the amount of additional funds needed.

III. Under this scenario the company would have a lower level of retained earnings but this would have no effect on the amount of additional funds needed

. IV. Under this scenario the company would have a higher level of retained earnings which would reduce the amount of additional funds needed. V. Under this scenario the company would have a higher level of retained earnings which would increase the amount of additional funds needed.

Answer 1

AFN = (A*/S0)?S – (L*/S0) ?S – M(S1)(RR)
A*	$      5,000,000	All Assets
S0	$      9,000,000	Sales 0
?S	$      2,250,000	S1 - S0
L*	$         900,000	AP + Accurals
M	4.0%	Profit Margin
S1	$    11,250,000	Sales 1
RR	100.0%	Retention Ratio
AFN	$               575,000

IV is correct.

No dividend implies 100% retention ratio, which increases the retained earnings and reduces AFN.