AFN Equation Broussard Skateboards Sales Are Expected To Ris ✓ Solved

AFN Equation Broussard Skateboards Sales Are Expected To I

Prepare an external funds needed (EFN) forecast using the AFN equation for Broussard Skateboards based on the following information: sales are projected to increase by 15% from $7.8 million in 2019 to $8.97 million in 2020. Assets were $2 million at the end of 2019, and since the firm is at full capacity, assets will grow at the same rate as sales. Current liabilities at the end of 2019 totaled $1.4 million, consisting of accounts payable ($450,000), notes payable ($500,000), and accruals ($450,000). The profit margin is forecasted at 4%, and the payout ratio at 75%. Use the AFN equation to forecast Broussard's additional funds needed for the upcoming year, entering your answer in dollars (rounded to the nearest dollar).

Sample Paper For Above instruction

Introduction

The advanced financial management decision-making process for firms involves understanding the interplay between sales growth, asset requirements, spontaneous liabilities, and retained earnings. The Additional Funds Needed (AFN) model is a vital tool to forecast external financing requirements based on projected sales and internal assumptions regarding profit margins, payout ratios, and asset productivity. This paper demonstrates how to apply the AFN equation to Broussard Skateboards' anticipated sales growth, asset needs, and financing position for 2020.

Understanding the Problem

Broussard Skateboards plans to increase its sales from $7.8 million to $8.97 million, representing a 15% growth rate. The company’s assets at the end of 2019 were $2 million, and because the company operates at full capacity, assets are expected to grow proportionally with sales. At the end of 2019, current liabilities are $1.4 million, including specific accounts such as accounts payable, notes payable, and accruals. The profit margin is forecasted at 4%, and the dividend payout ratio at 75%. The task is to estimate the additional external funds needed to support the projected sales increase using the AFN formula.

Applying the AFN Formula

The AFN formula is expressed as:

AFN = (A/S0) ΔS - (L/S0) ΔS - MS1(1 - POR)

Where:

  • A*/S0 = Assets required per dollar of sales in the current year.
  • L*/S0 = Spontaneous liabilities per dollar of sales in the current year.
  • ΔS = Change in sales
  • M = Profit margin = 4% or 0.04
  • S1 = Projected sales for 2020
  • POR = Payout ratio = 75% or 0.75

Step 1: Calculate projected sales (S1): $8.97 million.

Step 2: Determine assets needed (A*/S0):

  • Assets at the end of 2019: $2 million
  • Assets per dollar of sales: $2 million / $7.8 million ≈ 0.2564

Step 3: Determine spontaneous liabilities (L*/S0):

  • Spontaneous liabilities at end of 2019: $1.4 million
  • Liabilities per dollar of sales: $1.4 million / $7.8 million ≈ 0.1795

Step 4: Calculate ΔS:

  • ΔS = $8.97 million - $7.8 million = $1.17 million

Step 5: Compute AFN:

AFN = (0.2564)(1.17) - (0.1795)(1.17) - 0.04  8.97  (1 - 0.75)


= 0.3002 - 0.2102 - 0.0897


= - (0.0003)

The slight negative value suggests that the spontaneous financing and retained earnings will largely cover the projected sales growth, with a negligible external financing need. Rounding to the nearest dollar yields an external funds needed of approximately $0.

Conclusion

The application of the AFN methodology indicates Broussard Skateboards is nearly self-financing for the planned sales increase, with minimal to no external funding required. This result aligns with the company's current asset and liability structure, sales growth, and profit policies, highlighting the importance of internal financing mechanisms during moderate growth periods.

References

  • Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.
  • Ross, S. A., Westerfield, R. W., & Jaffe, J. (2019). Corporate Finance. McGraw-Hill Education.
  • Damodaran, A. (2015). Applied Corporate Finance. Wiley.
  • Higgins, R. C. (2018). Analysis for Financial Management. McGraw-Hill Education.
  • Gitman, L. J., & Zutter, C. J. (2015). Principles of Managerial Finance. Pearson.
  • Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2019). Fundamentals of Corporate Finance. McGraw-Hill Education.
  • Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management. Cengage Learning.
  • Frank, M. Z., & Goyal, V. K. (2003). Testing the Pecking Order Theory of Capital Structure. Journal of Financial Economics.
  • Myers, S. C. (1984). The Capital Structure Puzzle. Journal of Finance.
  • Opler, T., & Shah, R. (2000). The Role of Spontaneous and Discretionary Financing in Corporate Investment. Journal of Financial Economics.

Related Assignments