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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.
Computation of Broussard's Additional Funds Needed (AFN):
Additional Funds Needed = [A0 * (ΔS / S0)] - [L0 * (ΔS / S0)] - [S1 * PM * b]
Here,
Ao = current level of assets
Lo = current level of liabilities
ΔS/So = percentage increase in sales i.e. change in sales divided by current sales
S1 = new level of sales
PM = profit margin
b = retention rate = 1 - payout rate
AFN = [$4000000 * 0.20] - [(($450,000+$450,000) * 0.20] - [($8,880,000 * 0.07 * (1 - 0.40)]
= $800,000 - $180,000 - $372,960
= $247,040
