**(12-3) Broussard Skateboard\'s sales are expected to increase by 20% from $8.6

Question

**(12-3) Broussard Skateboard's sales are expected to increase by 20% from $8.6 million in 2013 to $10.32 million in 2014. Its assets totaled $5 million at the end of 2013. Baxter 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 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

Additional Funds Needed = Increase in Assets - Increase in Liabilities - Increase in retained earnings Where, Increase in Assets = Current Level Of Assets * Percentage increase in sales Increase in Liabilities = Current Level of Liabilities * Percentage increase in sales Increase in Retained Earnings = New Sales * Profit Margin * Retention Ratio Increase in Assets = Current Level Of Assets * Percentage increase in sales Current Level Of Assets = $5 million Percentage increase in sales = 20% Increase in Assets = $1 million Increase in Liabilities = Current Level of Liabilities * Percentage increase in sales Current Level of Liabilities = $1.4 million Percentage increase in sales = 20% Increase in Liabilities = $0.28 million Increase in Retained Earnings = New Sales * Profit Margin * Retention Ratio Retention Ratio = 100% (no dividends paid) Profit Margin = 4% New sales = $10.32 million Increase in Retained Earnings = 10.32 million * 0.04 * 100% = $0.4128 million Additional Funds Needed = Increase in Assets - Increase in Liabilities - Increase in retained earnings = $1 million - $0.28 million - $0.4128 million = $0.3072 million i.e. $307200

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