Additional Funds Needed
The Booth Company's sales are forecasted to double from $1,000 in 2016 to $2,000 in 2017. Here is the December 31, 2016, balance sheet:
Cash | $ 100 | Accounts payable | $ 50 | |||
Accounts receivable | 200 | Notes payable | 150 | |||
Inventories | 200 | Accruals | 50 | |||
Net fixed assets | 500 | Long-term debt | 400 | |||
Common stock | 100 | |||||
Retained earnings | 250 | |||||
Total assets | $1000 | Total liabilities and equity | $1000 |
Booth's fixed assets were used to only 50% of capacity during 2016, but its current assets were at their proper levels in relation to sales. All assets except fixed assets must increase at the same rate as sales, and fixed assets would also have to increase at the same rate if the current excess capacity did not exist. Booth's after-tax profit margin is forecasted to be 6% and its payout ratio to be 45%. What is Booth's additional funds needed (AFN) for the coming year? Round your answer to the nearest dollar.
Sales growth rate (g) = 100% |
Increase in Current Assets = (100+200+200)x100% = $500 |
Increase in Current Liabilities = (50+150+50)x100% = $250 |
Profit margin = 2,000 x 6% = $120 |
Retention ratio = 1-0.45 = 0.55 or 55% |
Addition to Retained earnings = $120 X55% |
Addition to Retained earnings = $66 |
Additional funds needed = Increase in current assets - Increase in current liabilities-Increase in retained earnings |
Additional funds needed = $500-250-$66 = $184 |
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