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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 $7.4 million in 2019 to $8.88 million in 2020. Its assets totaled $5 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 4%, and the forecasted payout ratio is 45%. Use the AFN equation to forecast Broussard's additional funds needed for the coming year.
Expert Solution
Computation of the additional fund needed (AFN):-
Additional funds needed = (A0 * (ΔS / S0)) - (L0 * (ΔS / S0)) - (S1 * PM * b)
Here,
Ao = Current level of assets = $5,000,000
Lo = Current level of liabilities = $450,000 + $450,000 = $900,000
ΔS/So = Percentage increase in sales = 20%
S1 = New level of sales = $8,880,000
PM = Profit margin = 4%
b = 1 - Payout ratio = 1 - 45%
AFN = (5000000 * 20%) - (900000 * 20%) - (8880000 * 4% * (1 - 45%))
= 1000000 - 180000 - 195360
= $624,640
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