Question

AFN equation

Broussard Skateboard's sales are expected to increase by 20% from $8.4 million in 2019 to $10.08 million in 2020. Its assets totaled $3 million at the end of 2019.

Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2019, 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 50%. Use the AFN equation to forecast Broussard's additional funds needed for the coming year. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as $1,200,000. Do not round intermediate calculations. Round your answer to the nearest dollar.

Answer 1

Formula for AFN Equation:-

AFN = (Assets/Sales)*Change in sales - (Spontaneous Liab/Sales)*Change in sales - Forecasted Sales*Profit Margin*(1- Payout Ratio)

where, Forecasted Sales in 2020 = $10.08 million

Change in sales = $10.08 million - $8.4 million

=$1.68 million

Total Assets = $3 million

Spontaneous Liability = Accounts Payable + Accured Liabilities (Notes Payable are not part of Spontaneous Liab)

= $ 450,000 + $ 450,000 = $900,000

Profit Margin = 3%

Payout Ratio = 50%

AFN = ($3 million/$8.4 million)*$1.68 million - ($0.9 million/$8.4 million)*$1.68 million - $10.08 million*3%*(1-0.50)

AFN = 600,000 - 180,000 - 151,200

AFN = $268,800

So, the forecast Broussard's additional funds needed for the coming year is $268,800

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