Question

4. Winter Snowboard Inc. sales are expected to increase 10% in 2019 from $15 million in 2018. Its assets at the end of 2018 were $5 million. The company is at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2018, current liabilities were $2.0 million, consisting of $400,000 of accounts payable, $1,000,000 of notes payable, and $600,000 of accruals. The after-tax profit margin is forecasted to be 4%, and the forecasted payout margin is 60%. What are the additional funds needed in 2019?

Answer 1

The additional funds needed in 2019 is $36,000

Step-by-step explanation:

Sales in 2019 = $15,000,000 * 1.10 = $16,500,000

Increase in sales = 10% * 15,000,000 = $1,500,000

Assets in 2019 = $5,000,000 * 1.1 = $5,500,000

Assets / Sales = $5,500,000 / $16,500,000 = 0.3333

Liabilities / Sales = $2,000,000 / $15,000,000 = 0.1333

After tax profit margin = 4% = Profit after tax /Sales

Profit after tax / $16,500,000 = 4%

Profit after tax = 4% * $16,500,000 = $660,000

Dividend = 60% * $660,000 = $396,000

Retained profit = (1 - 60%) * $660,000 = $264,000

Funds needed = (0.3333 * $1,500,000) - (0.1333 * $1,500,000) - $264,000 = $36,000

Answer 2

$36,000

Step-by-step explanation:

total assets last year = $5,000,000

total sales last year = $15,000,000

total current liabilities last year = $2,000,000

after tax profit margin = 4% of sales

forecasted sales = $16,500,000

dividend payout ratio = 60%

assets / sales = $5,000,000 / $15,000,000 = 33.33%

liabilities / sales = $2,000,000 / $15,000,000 = 13.33%

change in sales = $15,000,000 x 10% = $1,500,000

additional funds needed = (0.3333 x $1,500,000) - (0.1333 x $1,500,000) - [(0.04 x $16,500,000) x (1 - 0.6)] = $500,000 - $200,000 - $264,000 = $36,000