Winter snowboard inc. sales are expected to increase 10% in 2014 from$15 million

Question

Winter snowboard inc. sales are expected to increase 10% in 2014 from$15 million in 2013. Its assets at the end of 2013 were $5 million. The company is at full capacity, so its assets muct grow at the same rate as projected sales. At the end of 2013, current liability were $2.0 million, consisting of $400000 of accounts payable, $1000000 of notes payable, and $600000 of accruals. The after- tax profit margin is forecasted to be 4%, and the forecasted payout margin is 60%. What are the additional funds needed in 2014.

Explanation / Answer

Increase in sales = 10%

Increase in assets = $5 million * 10% = $500,000

Increase in accounts payable = $2 million * 10% = $200,000

Sales for 2014 = $15 million * 110% = $16,500,000

Profit for 2014 = Sales for 2014 * Profit margin = $16,500,000 * 4% = $660,000

Retained earnings for 2014 = Profit for 2014 * (1 - Payout ratio) = $660,000*(1-0.6) = $264,000

Additional funds needed in 2014 = Increase in assets - Increase in accounts payable - Retained earnings for 2014

Additional funds needed in 2014 = $500,000 - $200,000 - $264,000 = $36,000

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