Question

17. Problem 12-01 (AFN Equation)
eBook Problem Walk-Through
AFN equation

Broussard Skateboard's sales are expected to increase by 20% from $8.4 million in 2019 to $10.08 million in 2020. Its assets totaled $5 million at the end of 2019.

Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2019, 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. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as $1,200,000. Do not round intermediate calculations. Round your answer to the nearest dollar.

Answer 1

17. additional financing needed (AFN) for the coming year = (Total assets 2019/Sales 2019)*(change in sales) - (Total current liabilities 2019/Sales 2019)*(change in sales) - [(forecasted Profit margin*Sales 2020*(1 - forecasted dividend payout ratio)]

change in sales = Sales 2020 - Sales 2019 = $10,080,000 - $8,400,000 = $1,680,000

AFN for 2020 = ($5,000,000/$8,400,000)*$1,680,000 - ($1,400,000/$8,400,000)*$1,680,000 - [(0.05*$10,080,000*(1-0.60)]

AFN for 2020 = (0.5952380952380952*$1,680,000) - (0.1666666666666667*$1,680,000) - (0.05*$10,080,000*0.40)

AFN for 2020 = $999,999.9999999999 - $280,000.0000000001 - $201,600 = $518,400

Broussard's additional funds needed for the coming year is $518,400.