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 $7.4 million in 2016 to $8.88 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 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.

Explanation / Answer

Additional Funds Needed or AFN is the amount of money a company should raise to finance the increase in assets to meet the increasing sales requirement.

The simplified Formula for AFN = Projected Increase in Sales - Spontaneous Increase in Liabilities - Any Increase in Retained earnings

Hence, AFN = (A/S0)(S1-S0)-(L/S0)(S1-S0)-MS1(RR)

In above formula, lets understan the variables,

A = Assets = $ 4 Million

S0 = Pervious year's sales = $ 7.4 Million

S1 = Projected sales for next year = $ 8.88 Million

L = Spontenous liabilities that are affected by sales = 0.95 Million (Acounts Payable+ Notes Payable)

MS1 = Projected Net Income = The after tax profit margin is at 4%. from this information we will calculate the projected net income.

Profit margin formula = Net Income / Projected Net Sales

4% = Net Income / $ 8.88 Million

Net Income = $8.88 Million * 4% = 0.3552 Million

RR = Retention Ratio = 1 - Dividend Payout Ratio = 1 - (Net dividend / Net Income) = 1 - 0 = 1 / 100%

Substituting these values in the formula to calculate AFN,

AFN = (4/7.4)(8.88-7.4)-(0.95/7.4)(8.88-7.4)-0.3552*1 = 0.2548 Million

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