Problem 9-1 AFN equation Broussard Skateboard's sales are expected to increase by 20% from $9.0 million in 2015 to $10.80 million in 2016. Its assets totaled $3 million at the end of 2015. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2015, 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 55%. 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:
Expected Sales = $10,800,000
After Tax Profit Margin = $10,800,000 * 3%
After Tax Profit Margin = $324,000
Retention Ratio = 1 – Dividend Payout ratio
Retention Ratio = 1 – 0.55 = 0.45 or 45%
Addition to Retained Earnings = After Tax Profit Margin *
Retention Ratio
Addition to Retained Earnings = $324,000 * 45%
Addition to Retained Earnings = $145,800
As the assets are used to full capacity, all the sales will grow at increase in Sales Rate.
Increase in Assets = $3,000,000 * 20%
Increase in Assets = $600,000
Increase in Spontaneous Liabilities = ($450,000 + $450,000) *
20%
Increase in Spontaneous Liabilities = $180,000
Additional Fund Needed = Increase in Assets – Increase in
Spontaneous Liabilities - Addition to Retained Earnings
Additional Fund Needed = $600,000 - $180,000 - $145,800
Additional Fund Needed = $274,200
Problem 9-1 AFN equation Broussard Skateboard's sales are expected to increase by 20% from $9.0 million...
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