sales are expected to increase by 20% from $8.4 million in 2016 to $10.08 millio

Question

sales are expected to increase by 20% from $8.4 million in 2016 to $10.08 million in 2017. Its assets totaled $5 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, 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%. What would be the additional funds needed? Do not round intermediate calculations. Round your answer to the nearest dollar.

Explanation / Answer

Additional funds needed = increase in assets increase in liabilities – increase in retained earnings

= 1000000 - 280000 - 246960

= $473040

increase in assets = (5000000 x 20%) = $1000000

increase in liabilities = (1400000 x 20%) = $280000

increase in retained earnings = 2017 sales x profit margin x retention rate = 10080000 x 7% x (1-0.65) = $246960

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