sales are expected to increase by 15% from $8.0 million in 2016 to $9.20 million

Question

sales are expected to increase by 15% from $8.0 million in 2016 to $9.20 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 6%, and the forecasted payout ratio is 70%. Use the AFN equation to forecast Broussard's additional funds needed for the coming year. Round your answer to the nearest dollar. Do not round intermediate calculations.

Explanation / Answer

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

Increase in assets = 2016 assets × sales growth rate = $5 million × 15% = $750,000
Spontaneous increase in liabilities = 2016 liabilities × sales growth rate = $1.4 million × 15% = $210,000
Increase in retained earnings = 2017 sales × profit margin × retention rate = [2016 sales × (1 + sales growth rate)] × profit margin × retention rate = [$8 million x (1.15)] x 6% × (1 -70%) = $165,600

Additional Funds Needed = $750,000 - $210,000 - $165,600 = $374,400

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

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