Question

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 60%. What is Booth's additional funds needed (AFN) for the coming year? Round your answer to the nearest dollar.

Answer 1

Solution: Calculation of Additional Funds Needed (AFN) for the coming year Booth Company Balance sheet Particulars 2016 2017 ASSETS Cash 100 x2 $ 200 Accounts Receivable $ 200 x2 $ 400 Inventories $ 200 x2 $ 400 Net fixed asset $ 500 x1 $ 500 Total Assets $ 1,000 $ 1,500 is esses x2 LIABILITIES & EQUITY Accounts payable Notes payable Accruals Long-term debt Common stock Retained earnings Total Liabilities & Equity $ 100 $ 150 $ 100 $ 400 $ 100 $ 298 $1,148 | $ 352 100 250 1,000 $ $ +48 AFN Explanation: Capacity sales = Sales/0.5 = $1,000/0.5 = $2,000 Target FA/S ratio = $500/$2,000 = 0.25. Target FA = 0.25 x ($2,000) = $500 = Required FA Retained Earnings = (Margin) (Sales for 2017) (1 - Payout ratio) = 0.06 x ($2,000) x (0.4) = $48.