(12-6) The Booth Company\'s sales are forecasted to double from $1,000 in 2012 t
ID: 2645306 • Letter: #
Question
(12-6) The Booth Company's sales are forecasted to double from $1,000 in 2012 to $2,000 in 2013. Here is the December 31, 2012, balance sheet:
Booth's fixed assets were used to only 50% of capacity during 2012, but its current assets were at their proper levels in relation to sales. Spontaneous liabilities and 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 3% and its payout ratio to be 35%. What is Booth's additional funds needed (AFN) for the coming year? Round your answer to the nearest dollar.
$ _____
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 $1000Explanation / Answer
Answer : AFN = $ 361 as calculated below
Note 1: Increase in retained earning = sales * Profit margin * retention ratio
Where retention ratio = 1-payout ratio = 1-.35 = 65%
Increase in retained earnings = 2000 * 3% * 65% =$39
SO, AFN = Projected assets - projected liabilities excluding AFN
=1500 - 1139 = $ 361
Year 2012 2013 Comment Cash 100 200 To double in prportion of sales Accounts receivable 200 400 To double in prportion of sales Inventories 200 400 To double in prportion of sales Net fixed assets 500 500 Not required to Increase as we were at 50% capacity Total Assets 1000 1500 Total assets Liabilities Accounts payable 50 100 To double in prportion of sales Notes payable 150 150 To double in prportion of sales, AFN will be added later Accruals 50 100 To double in prportion of sales Long-term debt 400 400 Assumed same, AFN to be added to notes payable Common stock 100 100 To be same as only external fundings will change Retained earnings 250 289 250+39 from note 1 Total liabilities and equity 1000 1139Related Questions
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