Question

Cooper’s Lab, Inc.’s 2016 sales of $10,000 are expected to increase by 25% in 2017. The Lab’s total assets totaled $5,000 at the end of 2016. Currently the Lab is at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, current liabilities were $900, consisting of $400 in accounts payable, $300 of notes payable, and $200 of accruals. The net profit margin is forecasted to be 6.0% and the forecasted payout ratio is 50%.
a. What is 2017’s forecasted sales? (2 points)
b. Use the AFN equation to determine if Dr. Dread will need additional funds to achieve its 2017 sales growth. (5 points)

Answer 1

Sales of 2016 = $10,000

Expected increase in sales in 2017 = 25%

a). Forecasted Sales = Sales of 2016*(1+ Increase in Sales)

= $10,000*(1+0.25)

= $12,500

b). Formula for Additional funds Needed(AFN):-

AFN = (Assets/Sales)*Change in sales - (Spontaneous Liab/Sales)*Change in sales - [Forecasted Sales*Net profit Margin*(1-Dividend payout ratio)]

where, Change in Sales = $12500 - $10,000 = $ 2500

Forecasted Sales = $12,500

Spontaneous Liab = Accounts Payable + Accured Liabilities (notes Payable are not part of Spontaneous Liab)

= $ 400+ $ 200 = $600

Dividend payout ratio = 50%

AFN = [(5000/10000)*2500] - [(600/10000)*2500] - [$12500*6%*(1-0.50)]

AFN = 1250 - 150- 375

AFN= $725

As the AFN equation is positive, Dr Dread will need additional fund to achieve growth

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