Broussard Skateboard\'s sales are expected to increase by 20% from $7.8 million

Question

Broussard Skateboard's sales are expected to increase by 20% from $7.8 million in 2016 to $9.36 million in 2017. Its assets totaled $4 million at the end of 2016. Baxter 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 4%. Assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Do not round intermediate calculations. Round your answer to the nearest dollar.

Explanation / Answer

1. Computation of Additional Funds Needed

Sales Expected = $9360000

After Tax Profit Margin = $9360000 * 4% = $374400

Addition to Retained Earnings = $374400

Increase in Assets = Assets in 2016 * Sales Growth Rate = $4000000 * 20% =$800000

Increase in Liabilities = [$450000 + $450000] * 20% = $180000

AFN = Increase in Assets - Addition to Retained Earnings - Increase in Liabilities

AFN = $800000 - $180000 - $374400 = $245600

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