Question

Broussard Skateboard's sales are expected to increase by 20% from $8.2 million in 2016 to $9.84 million in 2017. Its assets totaled $3 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%, 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

AFN, i.e. additional funds needed, is essentially the amount that company needs to borrow from external sources so as to meet the additional assets requirement for keeping up with the additional sales, here the sales and assets from 2016 to 2017 have seen a growth of 20%, we calculate additional funds needed (AFN) using the following equation:

AFN = A₀ * S/S₀ - L₀ * S/S₀ - S₁ * PM * b

where, A₀ = Current level of assets (i.e. $ 3 million here)

S/S₀ = Percentage increase in sales (i.e. 20% here)

L₀ = Current level of liabilities (i.e. $ 1.4 million here)

S₁ = New level of sales i.e. $ 9.84 million here

PM = Profit Margin i.e. 3 % here

b = retention rate i.e. 1-payout ratio = 1-0.65 = 0.35 here

Now substituting the above mentioned values in the formula as mentioned,

we get, AFN = $ 318,967

HENCE WE GET $ 318,967 AS THE ADDITIONAL FUND NEEDED FOR BROUSSARD.