Question

Broussard Skateboard's sales are expected to increase by 25% from $7.2 million in 2019 to $9.00 million in 2020. Its assets totaled $5 million at the end of 2019.

Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2019, current liabilities were $1.4 million, consisting of $450000 of accounts payable, $500000 of notes payable, and $450000 of accruals. The after-tax profit margin is forecasted to be 3%, and the forecasted payout ratio is 55%. Use the AFN equation to forecast Broussard's additional funds needed for the coming year.

Answer 1

Broussard Skateboard's sales are expected to increase by 25% from $7.2 million in 2019 to $9.00 million in 2020. Its assets totaled $5 million at the end of 2019.

Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2019, current liabilities were $1.4 million, consisting of $450000 of accounts payable, $500000 of notes payable, and $450000 of accruals. The after-tax profit margin is forecasted to be 3%, and the forecasted payout ratio is 55%. Use the AFN equation to forecast Broussard's additional funds needed for the coming year.

The additional funds needed (AFN) equation is:

AFN = (A*/S0)ΔS - (L*/S0)ΔS - MS1(1 - d)

where:

A* = Total assets needed to support sales

S0 = Sales in the previous period

ΔS = Projected increase in sales

L* = Total spontaneous liabilities at capacity

M = Profit margin

d = Dividend payout ratio

S1 = Projected total sales

We can start by calculating the variables needed for the AFN equation:

A* = S1 × (A/S)

A* = $9.00 million × ($5 million / $7.2 million)

A* = $6.25 million

ΔS = $9.00 million − $7.2 million = $1.8 million

L* = $450000 + $500000 + $450000 = $1.4 million

M = 3%

d = 55%

S1 = $9.00 million

Now we can substitute these values into the AFN equation:

AFN = ($6.25 million / $7.2 million) × $1.8 million − ($1.4 million / $7.2 million) × $1.8 million − 0.03 × $9.00 million × (1 - 0.55)

AFN = $1.25 million − $0.28 million − $0.135 million

AFN = $0.79 million

Therefore, Broussard Skateboard's additional funds needed for the coming year is $0.79 million.

Answer 2

Step-by-step explanation:

The AFN (Additional Funds Needed) equation is:

AFN = (A*/S)ΔS - (L/S)*ΔS - M(1 - P)*ΔS

Where:

A* = assets that vary directly with sales

S = projected sales

ΔS = increase in sales

L* = spontaneous liabilities that vary directly with sales

M = after-tax profit margin

P = payout ratio

First, we need to calculate the assets that vary directly with sales. Since Broussard is already at full capacity, its assets must grow at the same rate as projected sales. Therefore, A* = S.

Next, we need to calculate the spontaneous liabilities that vary directly with sales. These are the current liabilities, which are already included in the AFN equation. Therefore, L* = current liabilities = $1.4 million.

The projected sales are not given in the question, so we cannot calculate the increase in sales. However, we can still calculate the AFN based on a percentage increase in sales. Let's assume a 10% increase in sales.

Using the given information, we can calculate the other variables:

M = after-tax profit margin = 3%

P = payout ratio = 55%

Substituting these values into the AFN equation, we get:

AFN = (A*/S)ΔS - (L/S)*ΔS - M(1 - P)*ΔS

AFN = (S/S)*0.10S - ($1.4 million/S)*0.10S - 0.03(1 - 0.55)*0.10S

AFN = 0.007S

Therefore, the additional funds needed for the coming year, based on a 10% increase in sales, is 0.7% of projected sales.

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