Broussard Skateboard%u2019s sales are expected to increase by 15% from $8 millio

Question

Broussard Skateboard%u2019s sales are expected to increase by 15% from $8 million in

2013 to $9.2 million in 2014. Its assets totaled $5 million at the end of 2013.

Broussard is already at full capacity, so its assets must grow at the same rate as

projected sales. At the end of 2013, 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 40%. Use the AFN equation to forecast Broussard%u2019s additional funds

needed for the coming year.

Explanation / Answer

AFN = $238,800

=================================================================================================================================================
Sales expected in 2013

=$9,200,000
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After-tax profit margin ($9,200,000*6%)=$552,000
=================================================================================================================================================
Dividend payments [$552,000*40%]=$220,800
=================================================================================================================================================
Addition to retained earnings [$552,000 - $220,800]=$331,200
=================================================================================================================================================
All the profits after the payment of dividend will be an addition to retained
earnings.As the assets are already at full capacity, all the assets should grow at the sales rate. It is to be noted that if the assets were not at full capacity, only the spontaneous assets wouldincrease.

=================================================================================================================================================
Increase in assets = $5,000,000*15%=$750,000
=================================================================================================================================================
Increase in liabilities = [$450,000+$450,000]*15%=$135,000
=================================================================================================================================================For current liabilities, only the accounts payable and accruals are treated as
spontaneous liabilities. Notes payable is not considered spontaneous for AFN calculation.
AFN = Increase in assets Increase in liabilities

=================================================================================================================================================

Addition to retained earnings
$750,000 - $135,000 - $331,200=$283,800 ANSWER

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