AFN equation: Siri Skate Inc. sales are expected to increase by 20% from $8.4 mi

Question

AFN equation:

Siri Skate Inc. sales are expected to increase by 20% from $8.4 million in 2013 to $10.08 million in 2014. Its assets totaled $5 million at the end of 2013. Siri 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 7%, and the forecasted payout ratio is 65%. Use the AFN equation to forecast Siri's additional funds needed for the coming year. Round your answer to the nearest dollar. Do not round intermediate calculations.

Explanation / Answer

Additional Fund Needed = Assets at the end of 2013 * Increase in sales in 2014 / Sales in 2013 - Liabilities at the end of 2013 * Increase in sales in 2014 / Sales in 2013 - Sales in 2014 * Profit margin * Retention margin

= $5,000,000 * $1,680,000 / $8,400,000 - $1,400,000 * $1,680,000 / $8,400,000 - $10,080,000 * 7% * (1 - 65%)

= $473,040

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