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Broussard Skateboard's sales are expected to increase by 20% from $7
Broussard Skateboard's sales are expected to increase by 20% from $7.6 million in 2019 to $9.12 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 6%, and the forecasted payout ratio is 75%. 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.
Expert Solution
Computation of the additional funds needed (AFN) for the coming year:-
Increase in assets = Total assets * Increase in sales
= $4,000,000 * 20%
= $800,000
Increase in spontaneous liabilities = (Accounts payable + Accruals) * Increase in sales
= ($450,000 + $450,000) * 20%
= $900,000 * 20%
= $180,000
Net income = Sales * Forecasted profit margin
= $9,120,000 * 6%
= $547,200
Addition to retained earnings = Net income * (1 - Dividend payout ratio)
= $547,200 * (1 - 75%)
= $136,800
Forecasted AFN = Increase in assets - Increase in spontaneous liabilities - Addition to retained earnings
= $800,000 - $180,000 - $136,800
= $483,200
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