Question

Broussard Skateboard's sales are expected to increase by 20% from $8.0 million in 2016 to $9.60 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 3%. 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.

Answer 1

Sol:

Additional funds needed (AFN) = Increase in assets - Increase in liabilities - Addition to retained earnings

Increase in total assets = Total assets at current level x Increase in sales

Increase in total assets = $4,000,000 x 20% = $800,000

Increase in liabilities = (Current liabilities - Notes payable) x Increase in sales

Increase in liabilities = ($1,400,000 - $500,000) x 20% = $180,000

Addition to retained earnings = Net income x retention ratio

Addition to retained earnings = ($9,600,000 x 3%) x (100% - 0)

Addition to retained earnings = $288,000 x 100% = $288,000

Now additional funds needed (AFN) = Increase in assets - Increase in liabilities - Addition to retained earnings

AFN = $800,000 - $180,000 - $288,000 = $332,000

Therefore additional funds that Broussard Skateboard's will need for the coming year will be $332,000.