Question

The Booth Company's sales are forecasted to double from $1,000 in 2018 to $2,000 in 2019. Here is the December 31, 2018, 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		$1,000		Total liabilities and equity		$1,000

Booth's fixed assets were used to only 50% of capacity during 2018, 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 45%. What is Booth's additional funds needed (AFN) for the coming year? Round your answer to the nearest dollar.

$  

Answer 1

AFN     =    (A^* X g ) - ( L^* X g ) - M X S₁ X RR

A* = Assets Projected to Increase with Sales

g = growth rate

L^{* =} Liabilities Projected to Increase with Sales

M =   Profit Margin

S₁ = projected Sales

RR = Retention Rate

A* = Total Assets - Fixed Assets

      =         1000 -500

      =             500

( since the FA are used only to 50% of its capacity- it means it can use its balance capacity of 50% to double its Sales in the next year so FA increment not required for additional sales . However all other assets will increase with an increase in sale.)

g = Sales is doubled from $1000 to $2000

   =   (2000-1000)/1000 % =   100% growth or 1.00

L^{* =} Accounts Payable = 50      ( notes payables and other liabiities wont increase due to sales)

M =   6% or 0.06

S₁ = $ 2000

RR = (1- Payout Ratio)  

       = (1-0.45)

      =0.55

Substituting above values in the formula we get

AFN     =    (A^* X g ) - ( L^* X g ) - M X S₁ X RR

             =     (500 X 100%) - ( 50 X 100% ) - 0.06 X 2000 X 0.55

             =          500          -         50                    -       66

             =    $ 384