Broussard Skateboard\'s sales are expected to increase by 25% from $7.8 million

Question

Broussard Skateboard's sales are expected to increase by 25% from $7.8 million in 2013 to $9.75 million in 2014. Its assets totaled $4 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 6%. 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 requirement can be calculated with the use of following formula:

Additional Funds Requirement = (Current Assets/Current Sales)*Change in Sales - (Current Liabilities/Current Sales)*Change in Sales - Profit Margin*New Sales*(1-Dividend Payout Ratio)

Here, dividend payout ratio is 0, since the company pays no dividends.

In case of liabilities, we include only spontaneous liabilities. Notes payable will therefore, not be considered in the calculation of AFN. We will include only accounts payable and accruals.

____________________

Using the values provided in the question in the above formula, we get

Additional Funds Requirement = (4,000,000/7,800,000)*(9,750,000 - 7,800,000) - (900,000/7,800,000)*(9,750,000 - 7,800,000) - 6%*(9,750,000)*(1-0) = $190,000

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