Skateboard\'s sales are expected to increase by 15% from $8.0 million in 2016 to

Question

Skateboard's sales are expected to increase by 15% from $8.0 million in 2016 to $9.20 million in 2017. Its assets totaled $5 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 6%, and the forecasted payout ratio is 70%. Use the AFN equation to forecast Broussard's additional funds needed for the coming year. Round your answer to the nearest dollar. Do not round intermediate calculations.

Explanation / Answer

Answer:

Sales expected in 2017 = $9200000

Required computations to be done in order to calculate AFN are:

1) After tax profit margin:

After tax profit margin = Expected sales * Percentage of After tax profit margin

After tax profit nargin = $9200000 * 6% = $552000

2) Dividend payments:

Dividend payments = After tax profit margin * Payout ratio

Dividend payments = $552000 * 70% = $386400

3) Addition to retained earnings:

Addition to retained earnings = After tax profit margin - Dividend payments

Addition to retained earnings = $552000 - $386400 = $165600

Note: All the profit after the payment of dividend will be addition to retained earnings.

4) Increase in assets:

Increase in assets = Assets in beginning of year (2017) * percentage increase

Increase in assets = $5000000 * 15% = $750000

Note: As the assets are already at full capacity, all the assets should grow at the sales rate. If the assets were not at full capacity, only the spontaneous assets would increase.

5) Increase in spontaneous laibilties:

Spontaneous liabilities = Accounts payable + Accruals

Spontaneous liabilities = $450000 + $450000 = $900000

Increase in liabilities = Spontaneous liabilities * Percentage increase

Increase in liabilities = $900000 *15% = $135000

Note: For current liabilities, only the accounts payable and accruals are treated as spontaneous liabilities. Notes payable is not considered spontaneous for AFN calculation.

Computing AFN:

AFN = Increase in assets - Increase in spontaneous liabilities - Addition to retained earnings

AFN = $750000 - $ 135000 - $165600 = $449400

Therefore, Broussard's additional funds needed for the coming year forecasted to be $4449400.

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