Problem 12-1 AFN equation Broussard Skateboard\'s sales are expected to increase
ID: 2769435 • Letter: P
Question
Problem 12-1
AFN equation
Broussard Skateboard's sales are expected to increase by 15% from $8.4 million in 2013 to $9.66 million in 2014. Its assets totaled $5 million at the end of 2013. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2013, 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 5%, and the forecasted payout ratio is 55%. Use the AFN equation to forecast Broussard's additional funds needed for the coming year. Round your answer to the nearest dollar. Do not round intermediate calculations
Explanation / Answer
Answer: $397650
AFN = (A*/S0)S - (L*/S0)S - MS1(1 - d)
Sales expected in 2013 =$9,660,000
After-tax profit margin
($9,660,000*5%)=$483,000
Dividend payments [$483,000*55%]=$265,650
Addition to retained earnings [$483,000 - $265650]=$217350
All the profits after the payment of dividend will be an addition to retained earnings. As the assets are already at full capacity, all the assets should grow at the sales rate. It is to be noted that if the assets were not at full capacity, only the spontaneous assets would increase.
Increase in assets = $5,000,000*15%=$750,000
Increase in liabilities = [$450,000+$450,000]*15%=$135,000
For current liabilities, only the accounts payable and accruals are treated asspontaneous liabilities. Notes payable is not considered spontaneous for AFN calculation.AFN = Increase in assets Increase in liabilities
Addition to retained earnings$750,000 - $135,000 - $217350=$397650