Broussard Skateboard\'s sales are expected to increase by 25% from $8.2 million

Question

Broussard Skateboard's sales are expected to increase by 25% from $8.2 million in 2016 to $10.25 million in 2017. Its assets totaled $3 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 4%. 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 higher level of retained earnings which would reduce the amount of additional funds needed.
II. Under this scenario the company would have a higher level of retained earnings which would increase the amount of additional funds needed.
III. 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.
IV. Under this scenario the company would have a lower level of retained earnings which would reduce the amount of additional funds needed.
V. 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.

* select one of the 5 options

Explanation / Answer

Sales Expected $10,250,000 10250000 After tax profit margin $410,000 Dividend payments 0 Additions To Retained Earnings 410000 Increase in Assets 750000 3000000*25% Increase in Liabilities 225000 (450000+450000)*25% 525000 400000 Additional Fund Needed - Increase in Assets - Increase in liabilities - Additions to Retained Earnings 750000-225000-410000 Additional Fund Needed 115000 The AFN is different from the one when the company pays dividend is because when dividends are paid retained earnings are reduced and therefore the amount of additional funds needed increases Therefore, Under this scenario the company would have a higher level of retained earnings which would reduce the amount of additional funds needed

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