Question

The firm is currently in the process of forecasting sales, asset requirements, and required funding for the coming year. In the year that just ended, Fuzzy Button Clothing Company generated $300,000 net income on sales of $12,500,000. The firm expects sales to increase by 15% this coming year and also expects to maintain its long-run dividend payout ratio of 45%. Suppose Fuzzy Button’s assets are fully utilized. Using the additional funds needed (AFN) equation to determine the increase in total assets that is necessary to support a firm’s expected sales, it is projected that Fuzzy Button will require in additional assets. When a firm grows, some liabilities grow spontaneously along with sales. Spontaneous liabilities are a source of capital that the firm will generate internally, so they reduce the need for external capital. How much of the total increase in assets will be supplied by spontaneous liabilities for Fuzzy Button this year? $72,000 $54,000 $51,000 $60,000

Answer 1

Answer: $60,000

Explanation:

Sales are expected to grow by 15% so current Liabilities will also have to increase by 15% in order to fund the increase in Assets.

Increase in Spontaneous liabilities = Increase in sales * Current Liabilities

= 15% * (Accounts Payable + Accrued Liabilities)

= 15% * (250,000 +150,000)

= $60,000