AFN Equation Broussard Skateboard\'s sales are expected to increase by 15% from

Question

AFN Equation

Broussard Skateboard's sales are expected to increase by 15% from $8.0 million in 2016 to $9.20 million in 2017. Its assets totaled $4 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 3%. Assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Do not round intermediate calculations. Round your answer to the nearest dollar.
$???

Why is this AFN different from the one when the company pays dividends?
I. Under this scenario the company would have a lower level of retained earnings but this would have no effect on the amount of additional funds needed.
II. Under this scenario the company would have a higher level of retained earnings which would reduce the amount of additional funds needed.
III. Under this scenario the company would have a higher level of retained earnings which would increase the amount of additional funds needed.
IV. Under this scenario the company would have a higher level of retained earnings but this would have no effect on the amount of additional funds needed.
V. Under this scenario the company would have a lower level of retained earnings which would reduce the amount of additional funds needed.

Explanation / Answer

Projected sales are expected to grew at 15% and the total assets are also expected to grew at same rate.

So, investment in asset required is 4mn * 15$ = $600,000.

So, this means there will be additional funds required of 600,000. However some fund would have came from increase in liability but whether there would be an increase in liabilities or not thats not mentioned anywhere, so we will consider current liabilities to be at same level and expect an additional funds requirement of 600,000.

If the will not distribute dividends as compared to it distributes dividend, the company will be having higher retained earnings since dividend is paid out of retained earnings, and with higher retained earnings, the amount of addional funds required for coming years will reduce, so our answer will be the 2nd point.

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