Question

AFN equation Broussard Skateboard's sales are expected to increase by 25% from $8.6 million in 2016 to $10.75 million in 2017. Its assets totaled $3 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 75%. 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

AFN = Increase in Assets - Increase in Liabilities - Addition in R.E

Sales expected in 2017 = $10.75 million

After-tax Profit = sales x after-tax profit margin = $10,750,000 x 0.05 = $537,500

Dividend Payments = After-tax Profit x Payout Ratio = $537,500 x 0.75 = $403,125

Addition to Retained Earnings = After-tax Profit - Dividend Payments

= $537,500 - $403,125 = $134,375

Increase in Assets = Assets x growth rate = $3,000,000 x 0.25 = $750,000

Increase in Liabilities = Current Liabilities x growth rate = [$450,000 + $450,000] x 0.25 = $225,000

AFN = $750,000 - $225,000 - $134,375 = $390,625