Question

Broussard Skateboard's sales are expected to increase by 15% from $8.0 million in 2016 to $9.20 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 4%. 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

Increase in total assets = Current total assets * Percentage increase in sales

Increase in total assets = $5,000,000 * 15% = $750,000

Increase in accounts payable = $450,000 * 15% = $67,500

Increase in accruals = $45,000 * 15% = $67,500

After tax profit for next year = Projected sales for next year * after tax profit margin = $9,200,000*4% = $368,000

Dividends paid = $0

Increase in retained earnings = After tax profit – Dividends paid = $368,000 - $0 = $368,000

Additional funds needed (AFN) = Increase in total assets – Increase in accounts payable and accruals – Increase in retained earnings

AFN = $750,000 - $67,500 - $67,500 - $368,000 = $247,000