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20 November, 07:14

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

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  1. 20 November, 09:11
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    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
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