AFN equation Broussard Skateboard\'s sales are expected to increase by 20% from

Question

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 $6 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 60%. What would be the additional funds needed? Do not round intermediate calculations. Round your answer to the nearest dollar.
$

Assume that an otherwise identical firm had $4 million in total assets at the end of 2016. Broussard's capital intensity ratio (A0*/S0) is than the otherwise identical firm; therefore, Broussard is capital intensive - it would require - increase in total assets to support the increase in sales.

Explanation / Answer

Additonal fund needed = Increase in Asset - Increase in Liablities - Addition to retained Earnings

Increase in Asset = $1.2 *6 Million - 6 Million = 1.2 million

Increase in Liablities = .20*(450000+500000) = 190000

Increase in retained earnings = Sales Expected - After Tax Profit Margin - Dividends payments

= 311040

Hence Additional fund needed = 1200000-190000-311040

= $ 698960

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