Question

Brousssard Skateboard's sales are expected to increase by 25% from 8.8 million in 2016 to $11.00 million in 2017. Its assets totaled $4 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 $450000 of account payable $500000 of notes payable and $450000 of accruals. The after tax profit margin is forecasted to be 4% and the forecasted payout ratio is 60%. what would be e additional funds needed?

Answer 1

Additional fund needed = Increase in assets - Increase in liabilities - Increase in retained earnings

Increase in assets = $4,000,000 * 25% = $1,000,000.

Increase in liabilities = ($450,000 * 25%) + ($450,000 * 25%)
= $112,500 + $112,500
= $225,000.

Increase in retained earnings = Sales * profit margin * (1 - payout ratio)
= $11,000,000 * 4% * (1-0.60)
= $176,000

Additional fund needed = $1,000,000 - $225,000 - $176,000 = $599,000

Additional fund needed = $599,000.