ales are expected to increase by 15% from $7.2 million in 2016 to $8.28 million
ID: 2730638 • Letter: A
Question
ales are expected to increase by 15% from $7.2 million in 2016 to $8.28 million in 2017. Its assets totaled $4 million at the end of 2016. Baxter 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 3%. 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.
Explanation / Answer
AFN = (A/S0)S–(L/S0)S–MS1(RR)
A- Assets tied directly to sales
L-spontaneous liabilities that are affected by sales
S0=the previous year's sales
S1=total projected sales for next year
S=the change in sales between S0 and S1
MS1=projected net income
RR=the retention ratio from net income
= ($4/$7.2)×$1.08–($0.90/$7.2)×$1.08–$8.28×3%
= $2,16,600
Therefore, the additional funds needed for the coming year is $216,600.
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