Broussard Skateboard\'s sales are expected to increase by 20% from $9.0 million
ID: 2772021 • Letter: B
Question
Broussard Skateboard's sales are expected to increase by 20% from $9.0 million in 2015 to $10.80 million in 2016. Its assets totaled $3 million at the end of 2015. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2015, 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 3%, and the forecasted payout ratio is 75%. 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
Net profit = Sales x profit margin
= 10.80 million x 3%
= 324,000
Plowback ratio = 1- 75% =25%
Addition to retained earnings = net profit x plowback ratio
= 324,000 x 25%
= 81,000
New Total Assets = old assets x( 1+ growth rate)
= 3,000,000 x( 1+0.20)
= 3,600,000
New current liabilities = old current liabilities x (1+ growth rate)
= 1,400,000 x (1+0.20)
= 1,680,000
Old equity = Old assets – old current liabilities
= 3,000,000 -1,400,000
= 1,600,000
AFN = Total new assets – Old equity – New current liabilities – addition to retained earnings
= 3,600,000 - 1,600,000-1,680,000 – 81000
= 239,000
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