Baxter Video Products\'s sales are expected to increase by 20% from $5million in

Question

Baxter Video Products's sales are expected to increase by 20% from $5million in 2010 to $6million in 2011. Its assets totaled $3million at the end of 2010. Baxter is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2010, current liabilities were $1million, consisting of $250,000 of account payable, $5000,000 of notes payable, and $250,000 of accruals. The after tax profit margin is forcasted to be 5%, and the forecasted patour ratio is 70%. Use the AFN equation to forecast Baxter's additional funds needed for the coming year

Explanation / Answer

AFN = (A/S0) x Increase in Sales - (L/S0)x increase in Sales - MS1(1 - d)
       = 3.0m x (6.0m - 5.0m) / 5.0m - (0.5 x (6.0m - 5.0m) / 5.0m - [0.05x6m(1-0.7)]
       = 0.6 - 0.1 - (0.3 x 0.3) = 0.41m = 410,000

S0 = Sales for 2010 = 5.0m
S1 = Sales for 2011 = 5.0m x 1.20 = 6.0m
MS1 = After tax profit margin rate x S1 = 6.0m x 5% = 0.30
L = Notes payable = 0.5m
d = Forecasted patour ratio = 70%

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