#2 AFN equation Broussard Skateboard\'s sales are expected to increase by 20% fr
ID: 2786406 • Letter: #
Question
#2
AFN equation
Broussard Skateboard's sales are expected to increase by 20% from $7.2 million in 2016 to $8.64 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 55%. What would be the additional funds needed? Do not round intermediate calculations. Round your answer to the nearest dollar.
$ __________
Explanation / Answer
Additional funds needed (AFN) is the amount of money a company must raise from external sources to finance the increase in assets required to support increased level of sales. Additional funds needed = increase in assets increase in liabilities – increase in retained earnings Increase in assets = 2016 assets × sales growth rate = $5 million * 20% = $10,00,000 Increase in liabilities = 2016 liabilities except notes payable × sales growth rate = ($450000+$450000)*20% = $1,80,000 Increase in retained earnings = 2017 sales × profit margin × retention rate = $8.64 million * 7% * (1-0.55) = $2,72,160 Additional funds needed = $10,00,000 - $1,80,000 - $2,72,160 = $5,47,840 Broussard's additional funds needed for the coming year = $5,47,840
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