Broussard Skateboard's sales are expected to increase by 25% from $8.0 million in 2016 to $10.00 million in 2017. Its assets totaled $5 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 6%. Assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Do not round intermediate calculations. Round your answer to the nearest dollar.
Current sales = $10 million
Change in sales = ($10 - $8) million = $2 million
Total assets = $5 million
Current liability = ( $450000 + $450000 ) = $900000 or $0.9 million
After tax profit margin = 6%
Company pays no dividend hence there pay out ratio is zero.
Formula = Increase in assets - Increase in liability - Addition to retained earnings.
Increase in assets = ( $5 million * 25% ) = $1.25 million
Increase in Liability = ( $0.9 million * 25% ) = $0.225 million
Addition to retained earning = ( Current sales * Profit margin )
= ( $10 million * 6% )
= $0.6 million
Additional fund needed = ( $1.25 - $0.225 - $0.6 ) million
= $0.425 millions or $425000
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