Broussard Skateboard\'s sales are expected to increase by 25% from $7.4 million

Question

Broussard Skateboard's sales are expected to increase by 25% from $7.4 million in 2013 to $9.25 million in 2014. Its assets totaled $2 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 5%, and the forecasted payout ratio is 55%. 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 Spontaneous increase in liabilities – Increase in retained earnings Ie. Additional Funds Needed= Current Level of Assets*(Change in Sales/Current Sales)- Current Level ofLiabilities*(Change in Sales/Current Sales)- New level of sales* Profit Margin*Retention Rate (2*0.25)-(1.4*0.25)-(9.25*0.05*(1-0.55)) -0.058125 Negative figure for additional funds needed means that there is a surplus of capital. Summary & Conclusion Requirement of Current asset-current liabilities(0.5-0.35)=).15 Mn . Which can met by funds generated internally ie. 0.208125 Mn. (Sales*Profit Margin*Retention Ratio) So, AFN= 0 (NIL)

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