12-1 Baxter video products sales are expected to increase by 20% from $5 million

Question

12-1 Baxter video products sales are expected to increase by 20% from $5 million in 2010 to $6 million at the end of 2010. Baxter is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2010, current liabilities were $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accruals. The after tax profit margin is forecasted to be 5%, and the forecasted payout ratio is 70%. Use the AFN equation to forecast Baxter

Explanation / Answer

A0 = $3,000,000 ?S = $1,000,000 S0 = $5,000,000 L0 = $500,000 M = 5% S1 = $6,000,000 POR = 70% AFN = (A0/S0)?S – (L0/S0)?S – M * S1)(1 – POR) = $1,000,000 – $1,000,000 – 0.05($6,000,000)(1 – 0.7) = (0.6)($1,000,000) – (0.1)($1,000,000) – ($300,000)(0.3) = $600,000 – $100,000 – $90,000 = $410,000.

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