Question

Booth's fixed assets were used to only 50% of capacity during 2019, but its current assets were at their proper levels in relation to sales. 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 5% and its payout ratio to be 30%. What is Booth's additional funds needed (AFN) for the coming year

Answer 1

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