Question

AFN equation Broussard Skateboard's sales are expected to increase by 15% from $7.6 million in 2016 to $8.74 million in 2017. Its assets totaled $4 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 60%. 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

The formula used for AFN equation is

=(Ao × ∆S/So) - (Lo × ∆S/So) - (S1 × PM × b)

Where,

Ao = current level of assets
Lo = current level of liabilities
ΔS/So = percentage increase in sales i.e. change in sales divided by current sales

So = current level Of sales
S1 = new level of sales
PM = profit margin
b = retention rate = 1 – payout rate

Putting the figures in the formula

= (4000000× 15%) - (1400000× 15%) - (8740000 × 5% × (1-60%))

=$ 215200 or $0.22 million

Additional Funds required is $0.22 million.