Question

AFN EQUATION

Broussard Skateboard's sales are expected to increase by 15% from $8.6 million in 2016 to $9.89 million in 2017. Its assets totaled $2 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 5%, and the forecasted payout ratio is 70%. 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

Additional Funds Needed = (A0/S0*(S1-S0)) - (L0/S0*(S1-S0)) - (PM*S1*b)

where

Ao - Assets (at time 0) which vary directly with Sales = 2000000

Lo - Liabilities (at time 0) which vary directly with Sales=1400000

So - Current Sales = 8600000

S1 - Projected Sales = 9890000

b - Retention ratio = 100-Payout ratio = 100-70 = 30

PM - Profit Margin = 5%

Additional Funds Needed = (2000000/8600000*(9890000-8600000)) - (1400000/8600000*(9890000-8600000)) - (.05*9890000*.3)

= 300000 - 210000-148350

= -58350