Question

Broussard Skateboard's sales are expected to increase by 15% from $7.8 million in 2016 to $8.97 million in 2017. Its assets totaled $5 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 65%. 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

Additional Fund Requirement using AFN Equation = Increase in Assets - Increase in Spontaneous Liabilities - Addition to Retained Earnings

Given Assets will increase at the same Rate as projected sales.

Therefore

Given

Expected Sales in 2017 = $8,970,000

After Tax Profit Margin = $8,970,000 * 5%

After Tax Profit Margin = $448,500

Forecasted Payout Ratio = 65%

Dividend Paid = 448,500 * 65%

= 291,525

Retained earning = After Tax Margin - Dividend Paid

= 448,500 - 291,525

= 156,975

Addition to Retained Earnings = 156,975

Increase in Assets = $5,000,000 * 15%

Increase in Assets = $750,000

Increase in Spontaneous Liabilities = ($450,000 + $450,000) * 15%

Increase in Spontaneous Liabilities = $135,000

Additional Fund Requirement using AFN Equation = Increase in Assets - Increase in Spontaneous Liabilities - Addition to Retained Earnings

= 750,000 - 135,000 - 156,975

= $458,025