Question

Quantitative Problem 1: Beasley Industries' sales are expected to increase from $5 million in 2017 to $6 million in 2018, or by 20%. Its assets totaled $3 million at the end of 2017. Beasley is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2017, current liabilities are $800,000, consisting of $170,000 of accounts payable, $350,000 of notes payable, and $280,000 of accrued liabilities. Its profit margin is forecasted to be 4%, and its dividend payout ratio is 60%.

Using the AFN equation, forecast the additional funds Beasley will need for the coming year. Do not round intermediate calculations. Enter your answer in dollars. For example, an answer of $2 million should be entered as 2,000,000. Round your answer to the nearest dollar. AFN = (A₀^*/S₀)ΔS - (L₀^*/S₀)ΔS - (M)(S₁)(1 - Payout ratio)

Answer 1

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Answer:

AFN = Increase in Total Assets - Increase in Spontaneous Liabilities - Addition to Retained Earnings

Increase in Total Assets = $ 3 million x 20 % = $ 360,000

Increase in Spontaneous Liabilities = $ ( 170,000 + 280,000 + 350000) x 20% = $1,60,000

Addition to Retained Earnings = $ 6,000,000 x 4 % x 40% = $ 96,000

AFN = $ 360,000 - $ 1,60,000 - $ 96,000 = $ 104,000