Question

AFN equation Broussard Skateboard's sales are expected to increase by 25% from $8.2 million in 2016 to $10.25 million in 2017. Its assets totaled $5 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 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 to Retained Earnings

Increase in Assets = $5,000,000 x 0.25 = $1,250,000

Increase in Liabilities = ($450,000 + $450,000) x 0.25 = $225,000

Net Income(2017) = Sales Expected x After-tax Profit Margin = $10,250,000 x 0.03 = $307,500

Dividend = Net Income x DPR = $307,500 x 0.75 = $230,625

So, Addition to Retained Earnings = $307,500 - $230,625 = $76,875

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

= $1,250,000 - $225,000 - $76,875 = $948,125