Question

AFN equation Broussard Skateboard's sales are expected to increase by 25% from $8.8 million in 2015 to $11.00 million in 2016. Its assets totaled $4 million at the end of 2015. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2015, 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 3%, and the forecasted payout ratio is 65%. What would be the additional funds needed? Do not round intermediate calculations. Round your answer to the nearest dollar.Problem 9-2 AFN equation Broussard Skateboards sales are expected to increase by 25% from $8.8 million in 2015 to $11.00 mil

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Answer #1

Answer a.

2015:

Sales = $8,800,000
Total Assets = $4,000,000
Profit Margin = 3.00%

Retention Ratio = 1 - Payout Ratio
Retention Ratio = 1 - 0.65
Retention Ratio = 0.35

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

2016:

Sales = $11,000,000

Addition to Retained Earnings = Sales * Profit Margin * Retention Ratio
Addition to Retained Earnings = $11,000,000 * 3.00% * 0.35
Addition to Retained Earnings = $115,500

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 - $115,500
Additional Fund Needed = $659,500

Answer b.

The capital intensity ratio is measured as A0*/S0. Broussard’s capital intensity ratio ($4,000,000/$8,800,000) is lower than that of the firm with $5 million ($5,000,000/$8,800,000) year-end 2015 assets; therefore, Broussard is more capital intensive - it would require a smaller increase in total assets to support the increase in sales.

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