Broussard Skateboard\'s sales are expected to increase by 25% from $7.4 million

Question

Broussard Skateboard's sales are expected to increase by 25% from $7.4 million in 2018 to $9.25 million in 2019, Its assets totaled $3 million at the end of 2018. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2018, 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 which would reduce the amount of additional funds needed II. 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 III. Under this scenario the company would have a higher level of retained earnings which would reduce the amount of additional funds needed. iv. Under this scenario the company would have a higher level of retained earnings which would increase the amount of additional funds needed. V. 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 Select-i

Explanation / Answer

We have

Additional Funds Needed = (A0/S0*(S1-S0)) - (L0/S0*(S1-S0)) - (PM*S1*b)

where

Ao - Assets (at time 0) which vary directly with Sales = 3 million

Lo - Liabilities (at time 0) which vary directly with Sales=1.4 million

So - Current Sales =7.4 million

S1 - Projected Sales = 9.25 million

b - Retention ratio = 1- payout ratio = 1- 0 = 1 = 100%

PM - Profit Margin = 3%

Additional Funds Needed = (3 million/7.4 million*(9.25 million - 7.4 million)) - (1.4 million/7.4 million*(9.25 million - 7.4 million)) - (.03*9.25 million*1)

= .75 million - .35 million - .2775 million

= $0.1225 million

= $122,500

Answer: IV. Under this scenario the comapny would have a higher level of retained earnings which would increase the amount of additional fund needed.

When a company pays dividend, its retention ratio decreases, ie; it is retaining less money in shareholder's equity which can be used for funding, hence increase the amount of additional fund needed.

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.