Question

Broussard Skateboard's sales are expected to increase by 25% from $7.6 million in 2018 to $9.50 million in 2019. Its assets totaled $3 million at the end of 2018.
Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2018, 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%. Assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Do not round intermediate calculations. Round your answer to the nearest dollar.
$  

Why is this AFN different from the one when the company pays dividends?
I. Under this scenario the company would have a lower level of retained earnings which would reduce the amount of additional funds needed.
II. Under this scenario the company would have a lower level of retained earnings but this would have no effect on the amount of additional funds needed.
III. Under this scenario the company would have a higher level of retained earnings which would reduce the amount of additional funds needed.
IV. Under this scenario the company would have a higher level of retained earnings which would increase the amount of additional funds needed.
V. Under this scenario the company would have a higher level of retained earnings but this would have no effect on the amount of additional funds needed.

Answer 1

Answer a.

2018:

Sales = $7,600,000
Total Assets = $3,000,000
Profit Margin = 3.00%

Retention Ratio = 1 - Payout Ratio
Retention Ratio = 1 - 0.00
Retention Ratio = 1.00

Spontaneous Current Liabilities = Accounts Payable + Accruals
Spontaneous Current Liabilities = $450,000 + $450,000
Spontaneous Current Liabilities = $900,000

2019:

Sales = $9,500,000

Addition to Retained Earnings = Sales * Profit Margin * Retention Ratio
Addition to Retained Earnings = $9,500,000 * 3.00% * 1.00
Addition to Retained Earnings = $285,000

Increase in Total Assets = $3,000,000 * 0.25
Increase in Total Assets = $750,000

Increase in Spontaneous Current Liabilities = $900,000 * 0.25
Increase in Spontaneous Current Liabilities = $225,000

Additional Fund Needed = Increase in Total Assets - Increase in Spontaneous Current Liabilities - Addition to Retained Earnings
Additional Fund Needed = $750,000 - $225,000 - $285,000
Additional Fund Needed = $240,000

Answer b.

Under this scenario the company would have a higher level of retained earnings which would reduce the amount of additional funds needed.