Question

Broussard Skateboard's sales are expected to increase by 15% from $7.2 million in 2016 to $8.28 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 7%, and the forecasted payout ratio is 70%. What would be the additional funds needed? Do not round intermediate calculations. Round your answer to the nearest dollar.

Answer 1

Profit (2017) = $8.28 mil * 7% = $ 0.5796 million

Payout = 70% of Profit = $.5796 million * 70% = $ 0.40752 million

Increase in Fixed assets= $5 mil *15%= $.75 million

In 2017 the funds will be required for the following:

• Purchase of Assets = $.75 million
• Payout of profits = $ 0.40752 million
• Payment of current liablities = $ 1.40 million

This totals to $ 2.55572 millions.

Assuming that the profits earned in 2017 are cash profits, we can subtract the amount of profits from our fund requirement.

Requirement $ 2.55572 millions

Less-Cash profits ($ 0.5796 million)

Net addition funds required $1.97612 millions