The Booth Company’s sales are forecasted to double from $1,000 in 2013 to $2,000
ID: 2714059 • Letter: T
Question
The Booth Company’s sales are forecasted to double from $1,000 in 2013 to $2,000 in
2014. Here is the December 31, 2013, balance sheet:
Cash $ 100 Accounts payable $ 50
Accounts receivable 200 Notes payable 150
Inventories 200 Accruals 50
Net fixed assets 500 Long-term debts 400
Common stock 100
Retained earnings 250
Total assets $1,000 Total liabilities and equity $1,000
Booth’s fixed assets were used to only 50% of capacity during 2013, but its current assets were at their proper levels in relation to sales. All assets except fixed assets must increase at the same rate as sales, and fixed assets would also have to increase at the same rate if the current excess capacity did not exist. Booth’s after-tax profit margin is forecasted to be 5% and its payout ratio to be 60%. What is Booth’s additional funds needed (AFN) for the coming year?
Explanation / Answer
Answer: Calculation of the Booth’s additional funds needed (AFN) for the coming year is:
Cash $ 100.00 ´ 2 = $ 200.00
Accounts receivable 200.00 ´ 2 = 400.00
Inventories 200.00 ´ 2 = 400.00
Net fixed assets 500.00 + 0.0 = 500.00
Total assets $1,000.00 $1,500.00
Accounts payable $ 50.00 ´ 2 = $ 100.00
Notes payable 150.00 150.00 + 360.00 = 510.00
Accruals 50.00 ´ 2 = 1 00.00
Long-term debt 400.00 400.00
Common stock 100.00 100.00
Retained earnings 250.00 + 40 = 290.00
Total liabilities
and equity $1,000.00 $1,140.00
AFN $ 360.00
Capacity sales = Sales/0.5 = $1,000/0.5 = $2,000.
Target FA/S ratio = $500/$2,000 = 0.25.
Target FA = 0.25($2,000) = $500 = Required FA. Since the firm currently has $500 of fixed assets, no new fixed assets will be required.
Addition to RE = M(S1)(1 - Payout ratio) = 0.05($2,000)(0.4) = $40.
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