AFN equation Broussard Skateboard\'s sales are expected to increase by 15% from

Question

AFN equation

Broussard Skateboard's sales are expected to increase by 15% from $8.4 million in 2013 to $9.66 million in 2014. Its assets totaled $5 million at the end of 2013. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2013, 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 5%, and the forecasted payout ratio is 55%. 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 in 2014 = $9.66 million

After-tax profit = $9.66 million * 0.05

                             = 0.483 million

Retention ratio = 1 - forecasted payout ratio

                            = 1 - 55%

                            = 45%

After-tax profit retained = 0.483 million * 45%

                                             = 0.21735 million

Additional funds needed = (Assets* growth rate) – (Current liabilities * growth rate) - After-tax profit retained

= (5 million* 0.15) – (1.4 million * 0.15) - 0.21735 million

= 0.75 million - 0.21 million - 0.21735 million

= 0.75 million - 0.42735 million

= 0.32265 million

= $ 322,650

Answer : Additional funds needed is $ 322,650

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