AFN equation Broussard Skateboard\'s sales are expected to increase by 25% from

Question

AFN equation

Broussard Skateboard's sales are expected to increase by 25% from $7.6 million in 2013 to $9.50 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 5%, and the forecasted payout ratio is 65%. Use the AFN equation to forecast Broussard's additional funds needed for the coming year. Round your answer to the nearest dollar. Do not round intermediate calculations.

Explanation / Answer

Funds required to support acquisition of additional assets =Current asset level*sales growth = $(5*0.25)mill.= $1.25 million

Funds offset by increase in spontaneous liability = current liabl*sales growth =$ (0.9*0.25) mill = $0.225 million

Notes Payable is not a spontaneous source of funds as the creditors and firm would have to take appropriate actions to revise it and thus is not a component of spontaneous liability. .

Increase in RE through such acquisition = Proj. Sales*Profit Margin*Retention Ratio = $(9.5*.05*.35)million = $0.16625 million

AFN = $(1.25 - 0.225 - 0.16625) million = $0.85875 million = $858,750

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