This question is incomplete. The complete question is given below:
The Booth Company's sales are forecasted to double from $1,000 in 2016 to $2,000 in 2017. Here is the December 31, 2016, balance sheet:
Cash $ 100 Accounts payable $ 50
Accounts receivable 200 Notes payable 150
Inventories 200 Accruals 50
Net fixed assets 500 Long-term debt 400
Common stock 100
Retained earnings 250
Total assets $1000 Total liabilities and equity $1000
Booth's fixed assets were used to only 50% of capacity during 2016, but its current assets were at their proper levels in relation to sales. Spontaneous liabilities and all assets except fixed assets must increase at the same rate as sales, and fixed assets would also have to increase at the same rate if the current excess capacity did not exist. Booth's after-tax profit margin is forecasted to be 3% and its payout ratio to be 50%. What is Booth's additional funds needed (AFN) for the coming year? Round your answer to the nearest dollar.
Answer:
Booth's additional funds needed (AFN) for the coming year = 370
Explanation:
Additional Funds Needed (AFN):
Additional Funds Needed (AFN) is a way of calculating how much new funding will be required, so that the firm can realistically look at whether or not they will be able to generate the additional funding and therefore be able to achieve the higher sales level.
Formula of AFN:
AFN = [ ( A / S0 ) * ΔS - ( L / S0 ) * ΔS - MS1 * ( RR ) ]
where
A = Assets linked with sales
Formula for Assets:
Assets = Cash + Account receivable + Inventories
As
Cash = 100
Account receivable = 200
Inventories = 200
therefore by putting the values in the above formula, we get
= 100 + 200 + 200
= 500
ΔS = Difference in sales between S0 and S1
S0 = Sales of last year
S1 = Total projected sales for next year
As the Booth Company's sales are forecasted to double from $1,000 in 2016 to $2,000 in 2017 so
ΔS = 2000 - 1000
ΔS = 1000
L = Spontaneous liabilities
Formula for Spontaneous liabilities:
L = Accounts payable + Accruals
therefore by putting the values in the above formula, we get
L = 50 + 50
L = 100
MS1 = Projected net income
RR = Retention Ratio
M = 0.05
RR = 1 - 0.7
RR = 0.3
therefore by putting the values in the above formula, we get
Additional Funds Needed = ( 500 / 1000 ) * 1000 - ( 100 / 1000 ) * 1000 - 0.05 * 2000 * 0.3
Additional Funds Needed = 370
Therefore, Booth's additional funds needed (AFN) for the coming year = 370
