Question

AFN equation Broussard Skateboard's sales are expected to increase by 25% from $9.0 million in 2016 to $11.25 million in 2017. Its assets totaled $4 million at the end of 2016. Broussard is already at full capacity, so its assets m. 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 5%, and the forecasted payout ratio is 75%. What would be the additional funds needed? Do not round intermediate calculations. Round your answer to the nearest dollar. Assume that an otherwise identical firm had $5 million in total assets at the end of 2016. The identical firm's capital intensity ratio (A0*/So) is - Select than Broussard's; therefore, the identical firm is Select capital intensive - it would require Select increase in total assets to support the increase in sales.

Answer 1

Answer to Question 1:

2016:

Sales = $9,000,000
Total Assets = $4,000,000
Profit Margin = 5.00%

Retention Ratio = 1 - Payout Ratio
Retention Ratio = 1 - 0.75
Retention Ratio = 0.25

Spontaneous Current Liabilities = Accounts Payable + Accruals
Spontaneous Current Liabilities = $450,000 + $450,000
Spontaneous Current Liabilities = $900,000

2017:

Sales = $11,250,000

Addition to Retained Earnings = Sales * Profit Margin * Retention Ratio
Addition to Retained Earnings = $11,250,000 * 5.00% * 0.25
Addition to Retained Earnings = $140,625

Increase in Total Assets = $4,000,000 * 0.25
Increase in Total Assets = $1,000,000

Increase in Spontaneous Current Liabilities = $900,000 * 0.25
Increase in Spontaneous Current Liabilities = $225,000

Additional Fund Needed = Increase in Total Assets - Increase in Spontaneous Current Liabilities - Addition to Retained Earnings
Additional Fund Needed = $1,000,000 - $225,000 - $140,625
Additional Fund Needed = $634,375

Assume that an otherwise identical firm had $5 million in total assets at the end of 2016. The identical firm’s capital intensity ratio (A0*/S0) is higher than Broussard’s; therefore, the identical firm is more capital intensive - it would require higher increase in total assets to support the increase in sales.