Fill This Form To Receive Instant Help
Fill This Form To Receive Instant Help
Homework answers / question archive / Broussard Skateboard's sales are expected to increase by 20% from $7
Broussard Skateboard's sales are expected to increase by 20% from $7.4 million in 2019 to $8.88 million in 2020. Its assets totaled $4 million at the end of 2019.
Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2019, 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 40%. Use the AFN equation to forecast Broussard's additional funds needed for the coming year. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as $1,200,000. Do not round intermediate calculations. Round your answer to the nearest dollar.$
Sales in 2020 = $8.88 million or $8,880,000 | Sales Growth in 2020 = 20%
Addition to Retained Earnings:
Forecasted After-tax Profit margin = 7%
After-Tax Profit = After-tax Profit margin * Sales = 7% * $8,880,000 = $621,600
Dividend Payout Ratio in 2020 = 40%
Addition to Retained Earnings = After-tax Profit * (1 - Dividend Payout ratio) = 621,600 * (1 - 40%) = 621,600 * 60%
Addition to Retained Earnings in 2020 = $372,960
Increase in Assets needed to support Sales growth:
Assets in 2019 = $4,000,000
Since Assets are already operating at full capacity, Assets will grow at same rate as Sales.
Increase in Assest needed for growth in Sales = Assets in 2020 * Growth rate = 4,000,000 * 20%
Increase in Assest needed for growth in Sales in 2020 = $800,000
Change in Current Liabilities to fund the Sales growth:
Since Notes Payable is not an operating liability, hence, we are not including it in the Current Liabilities calculation.
We will consider only Accounts Payables and Accruals which will grow at same rate as Sales in 2020 to fund the growth.
Accounts Payable in 2019 = $450,000
Increase in A/P in 2020 = Accounts Payable in 2019 * Growth = 450,000 * 20% = $90,000
Accruals in 2019 = $450,000
Increase in Accruals in 2020 = Accruals in 2019 * Growth = 450,000 * 20% = $90,000
Additional Financing Needed:
AFN = Increase in Assets required for growth - Increase in Accounts Payable - Increase in Accruals - Addition to Retained Earnings
Putting calculated values, AFN = 800,000 - 90,000 - 90,000 - 372,960
Hence, Additional Funding Needed or AFN = $247,040
