Question

Broussard Skateboard's sales are expected to increase by 25% from \$7.0 million in 2016 to \$8.75...

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 \$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 3%, 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.

Formula to calculate additional funds needed (AFN)

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

Where,

A0 = current level of assets =\$2,000,000

S0 = current sales = \$7,000,000

ΔS/S0 = percentage increase in sales = 25%

L0 = current level of liabilities (spontaneous liabilities) = account payable + accrued liability = \$450,000 + \$ 450,000 = \$900,000

S1 = Increased sales = S0*(1+25%) = \$8,750,000

PM = profit margin = 3%

b = retention rate = 1 – payout rate = 1- 0.70 = 0.30

Therefore

AFN = \$2,000,000 * 25% - \$900,000 *25% - \$8,750,000 *3% *0.30

= \$500,000 - \$225,000 - \$78,750 = \$196,250

Additional Funds Needed (AFN) for the company is \$196,250

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