Question

Beasley Industries' sales are expected to increase from $5 million in 2017 to $6 million in 2018, or by 20%. Its assets totaled $2 million at the end of 2017. Beasley is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2017, current liabilities are $770,000, consisting of $150,000 of accounts payable, $350,000 of notes payable, and $270,000 of accrued liabilities. Its profit margin is forecasted to be 4%, and its dividend payout ratio is 60%. Using the AFN equation, forecast the additional funds Beasley will need for the coming year. Do not round intermediate calculations. Enter your answer in dollars. For example, an answer of $2 million should be entered as 2,000,000. Round your answer to the nearest dollar.

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Answer 1

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

Increase in Total Assets = $2,000,000 *- 20 % = $400,000

Increase in Spontaneous Liabilities = ($150,000 + $270,000) * 20% = $84,000

Addition to Retained Earnings = $6,000,000 * 4 % x (1-0.60) = $96,000

AFN = $400,000 - $84,000 - $96,000 = $220,000

AFN = $220,000.

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