Quantitative Problem 1: Beasley Industries\' sales are expected to increase from
ID: 2730150 • Letter: Q
Question
Quantitative Problem 1: Beasley Industries' sales are expected to increase from $5 million in 2017 to $6 million in 2018, or by 20%. Its assets totaled $2 million at the end of 2017. Beasley is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2017, current liabilities are $710,000, consisting of $150,000 of accounts payable, $400,000 of notes payable, and $160,000 of accrued liabilities. Its profit margin is forecasted to be 4%, and its dividend payout ratio is 50%. Using the AFN equation, forecast the additional funds Beasley will need for the coming year. Round your answer to the nearest dollar. Do not round intermediate calculations.
$
Explanation / Answer
AFN = (A*/S0)S – (L*/S0)S – MS1(RR)
Where:
A* = Assets tied directly to sales and will increase
L* = Spontaneous liabilities that will be affected by sales.
S0 = Sales during the last year
S1 = Total sales projected for next year (the new level of sales).
S = The increase in sales between S0 and S1
M = Profit margin, or the profit per unit of sales
MS1 = Projected Net Income
RR = The retention ratio from Net Income and is also calculated as (1 – payout ratio)
AFN = ($2,000,000/$5,000,000)×$1,000,000–(($150,000+$160,000)/$5,000,000)×$1,000,000–$6,000,000×4%×50%
= $400,000-$62,000-$120,000
= $218,000