Question

9-1-AFN equation

Broussard Skateboard's sales are expected to increase by 15% from $8.0 million in 2018 to $9.60 million in 2019. Its assets totaled $5 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 6%, and the forecasted payout ratio is 40%. 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 1

Answer:

Expected Sales = $9,600,000
After Tax Profit Margin = $9,600,000 * 6%
After Tax Profit Margin = $576,000

Retention Ratio = 1 – Dividend Payout ratio
Retention Ratio = 1 – 0.40 = 0.60 or 60%

Addition to Retained Earnings = After Tax Profit Margin * Retention Ratio
Addition to Retained Earnings = $576,000 * 60%
Addition to Retained Earnings = $345,600

As the assets are used to full capacity, all the sales will grow at increase in Sales Rate.

Increase in Assets = $5,000,000 * 15%
Increase in Assets = $750,000

Increase in Spontaneous Liabilities = ($450,000 + $450,000) * 15%
Increase in Spontaneous Liabilities = $135,000

Additional Fund Needed = Increase in Assets – Increase in Spontaneous Liabilities - Addition to Retained Earnings
Additional Fund Needed = $750,000 - $135,000 - $345,600
Additional Fund Needed = $269,400