Sales are expected to increase by 15% from $9.0 million in 2016 to $10.35 million in 2017. Its assets totaled $3 million at the end of 2016. It 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%, and the forecasted payout ratio is 75%. Use the AFN equation to forecast additional funds needed for the coming year.
Spontaneous Current Liabilities = Accounts Payable + Accruals = $450,000 + $450,000 = $900,000
Net Income = Sales * After-tax Profit Margin = $10,350,000 * 0.03 = $310,500
Addition to Retained Earnings = Net Income * (1 - Payout Ratio) = $310,500 * (1 - 0.75) = $77,625
Increase in Total Assets = 15% * $3,000,000 = $450,000
Increase in Spontaneous Current Liabilities = 15% * $900,000 = $135,000
Additional Funds Needed = Increase in Total Assets - Increase in Spontaneous Current Liabilities - Addition to Retained Earnings
Additional Funds Needed = $450,000 - $135,000 - $77,625
Additional Funds Needed = $237,375
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