AFN Equation: Broussard Skateboard%u2019s sales are expected to increase by 15%

Question

AFN Equation: Broussard Skateboard%u2019s sales are expected to increase by 15% from $8 million at the end of 2012. Brassard is already at full capacity, so it assets must grow at the same rate as projected sales. At the end of 2012, current liabilities were $1.4 million, consisting of $450,00 of account payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecast to be 6%, and the forecasted payout ratio is 40%. Use the AFN equation to forecast Brossard%u2019s additional funds needed for the coming year?

Explanation / Answer

AFN = (A*/S0)%u2206S - (L*/S0)%u2206S - M*S1(RR)

where A* = Assets tied directly to sales=8M

L* = Liabilities that increase spontaneously (AP and accruals %u2013 not bank loans or bonds)=450,000+450,000=0.9M

A*/S0 and L*/S0 %u2013 percentage of sales

S0=Sales last year = 8M

S1=Sales this year = 1.15*8= $9.20M

%u2206S = change in sales = 15%

M = profit margin =6%

RR = retention ratio =(1-dividend payout)=(1-40%)=60%

So AFN = (8/8)*(9.20-8.00) -(0.9/8)*(9.20-8.00)-6%*9.20*60%

ie AFN = $0.73M

So Addl Fund reqd = 730,000

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.