Question

Broussard Skateboard's sales are expected to increase by 25% from $7.0 million in 2016 to $8.75 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 65%. What would be the additional funds needed? Do not round intermediate calculations. Round your answer to the nearest dollar.

Answer 1

Additional Funds Needed [AFN]

• Expected Next Year Sales = $87,50,000
• After Tax profit Margin = $612,500 [$87,50,000 x 7%]
• Dividend Pay-out = $398,125 [$612,500 x 65%]
• Therefore, Additions to Retained Earnings will be $214,375 [$612,500 - $398,125]
• Increase in Assets = $12,50,000 [$50,00,000 x 25%]
• Increase in Liabilities = $225,000 [($450,000 + $450,000) x 25%]

• Additional Funds Needed [AFN]

Additional Funds Needed [AFN] = Increase in Assets – Increase in Liabilities – Additions to retained earnings

= $12,50,000 - $225,000 - $214,375

= $810,625

• “Therefore, the Broussard's Additional Funds Needed = $810,625”