Broussard Skateboard\'s sales are expected to increase by 15% from $8 million in

Question

Broussard Skateboard's sales are expected to increase by 15% from $8 million in 2013 to $9.2 million in 2014. Its assets totaled $3 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 7%, and the forecasted payout ratio is 55%. Use the AFN equation to forecast Brous-sard's additional funds needed for the coming year.

Explanation / Answer

AFN = Increase in assets - Increase in spontaneous liabilities - Increase in retained earnings

Increase in assets = $ 3,000,000 x 0.15 = $ 450,000

Increase in spontaneous liabilities = $ ( 450,000 + 450,000) x 0.15 = $ 135,000 ( Notes payable not considered to be a spontaneous liability)

Increase in retained earnings = Sales x after-tax profit margin x forecasted retention ratio = $ ( 8,000,000 x 1.15) x 0.07 x ( 1-0.55) = $ 289,800

AFN = $ 450,000 - $ 135,000 - $ 289,800 = $ 25,200

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