Question

AFN Equation

Broussard Skateboard's sales are expected to increase by 20% from $7.8 million in 2016 to $9.36 million in 2017. Its assets totaled $5 million at the end of 2016. Baxter 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 4%. Assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Do not round intermediate calculations. Round your answer to the nearest dollar.
$   

Answer 1

Additional Funds Needed [AFN] for the coming year = $445,600

Calculations

Expected Sales = $93,60,000

After Tax profit Margin = $93,60,000 x 4% = $374,400

Company’s pays no dividend during the year, Therefore, Additions to Retained Earnings will be $374,400

Increase In Assets = $50,00,000 x 20% = $10,00,000

Increase in Liabilities = [ $450,000 + 450,000 ] x 20% = $180,000

Additional Funds Needed [AFN] for the coming year

= Increase in Assets – Increase in Liabilities – Additions to retained earnings

= $10,00,000 - $180,000 - $374,400

= $445,600