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Homework answers / question archive / Broussard Skateboard's sales are expected to increase by 25% from $7
Broussard Skateboard's sales are expected to increase by 25% from $7.4 million in 2016 to $9.25 million in 2017. Its assets totaled $3 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 7%, and the forecasted payout ratio is 75%. Use the AFN equation to forecast Broussard's additional funds needed for the coming year.
The information required for additional financing needs for the next year
Projected Sales in 2017 = Sales in 2015 * 125%
= $9,250,000
After-Tax profit = Projected Sales in 2017 * After-tax profit margin
=$9,250,000 * 7%
= $647,500
Addition to retained earnings in 2017 = After-tax profit * (1 - Dividend payout ratio)
= $647,500 * ( 1- 0.75)
= $647,500 * 0.25
= $161,875
Increase in assets in 2017 = Assets in 2016 * 25%
= $3,000,000 * 25%
=$750,000
Increase in liabilities in 2017 = (Accounts payable 2016 + Accruals in 2016) * 25%
=($450,000 + $450,000) * 25%
=$900,000 * 25%
=$225,000
The additional financing needs calculated below
AFN = Increase in assets - Increase in liabilities - addition to retained earnings
= $750,000 - $225,000 - $161,875
=$363,125
Broussard's additional fund's requirement for the coming year will be $363,125.
