The Booth Company\'s sales are forecasted to double from $1,000 in 2018 to $2,00
ID: 2814044 • Letter: T
Question
The Booth Company's sales are forecasted to double from $1,000 in 2018 to $2,000 in 2019. Here is the December 31, 2018, balance sheet: Cash $ 100 Accounts payable $ 50 Accounts receivable 200 Notes payable 150 Inventories 200 Accruals 50 Net fixed assets 500 Long-term debt 400 Common stock 100 Retained earnings 250 Total assets $1,000 Total liabilities and equity $1,000 Booth's fixed assets were used to only 50% of capacity during 2018, but its current assets were at their proper levels in relation to sales. All assets except fixed assets must increase at the same rate as sales, and fixed assets would also have to increase at the same rate if the current excess capacity did not exist. Booth's after-tax profit margin is forecasted to be 6% and its payout ratio to be 45%. What is Booth's additional funds needed (AFN) for the coming year? Round your answer to the nearest dollar. $
Explanation / Answer
Now we forecast the balance sheet to calculate the Additional funds needs.
The fixed assets will not be increased since only 50% of the capacity is being utilized presently, when the sales doublesm the utlization also doubles from 50% to 100%. So the fixed assets will be utilized to full (100%) capacity and new fixed assets are not required
New Sales = 2,000
Net profit = 6%*2000 = 0,06*2000 = 120
Dividends = 0.45*120 = $54
Retained earnings = 120-54 = $66
Under current liabilties, notes payable is not a spontaneous current liability and hence we do not increase it by the same extent to the increase in sales
The balance sheet is as follows:
Additional funds needed = $334
Assets Liabilties and Equity Current Assets Current liabilties Cash 200 Accounts payable 100 Accounts receivable 400 Notes Payable 150 Inventories 400 Accruals 100 Total current assets 1000 Total current liabilties 350 Total fixed assets 500 Long term debt 400 Common stock 100 Retained earnings 250 Addition to retained earnings 66 Total Assets 1500 Total liabilties and Equity 1166 AFN 334Related Questions
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