Question

Broussard Skateboard's sales are expected to increase by 25% from $7.0 million in 2016 to $8.75 million in 2017. Its assets totaled $4 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, 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 5%. 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.

Answer 1

Sales in 2016=   7000000  
Change in sales=   25%  
Forecasted sales (FS)=   8750000  
Assets in 2016=   4000000  
Liabilities in 2016=   1400000  
Profit margin (PM)=   5%  
Dividends=   0 . So d Dividend payout ratio is 0
      
External financing formula = (A*Change in sales%)-(L*Change in sales%)-(PM*FS*(1-d))

=(4000000*25%)-(1400000*0%)-(5%*8750000*(1-0))      
=562500      

So external financing is   $562,500.00