Question

AFN equation Broussard Skateboard's sales are expected to increase by 15% from $8.4 million in 2018 to $9.66 million in 2019. Its assets totaled $6 million at the end of 2018. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2018, 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%, 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 the company's year-end 2018 assets had been $7 million. Is the company's "capital intensity" ratio the same or different? The capital intensity ratio is measured as A0*/So. Broussard's current capital intensity ratio is -Select- that of the firm with $7 million year-end 2018 assets; therefore, Broussard is-Select- capital intensive - it would require ( -Select- increase in total assets to support the increase in sales. Check My Work Ican Kau

Answer 1

Given Sales in 2016 Sales increase by in 2017 Sales in 2017 Assets at 2016 end Account Payable Note payable Accruals After tax profit margin Payout ratio Retention ratio (1-payout ratio) 8400000 15% 9660000 6000000 450000 500000 450000 6% 75% 25% Solution We know that AFN = Increase in asset - Increase in spontaneous liability - increase in retained earning Increase in asset = Asset in 2016 6000000 900000 X sales increase % X 15% Increase in spontaneous Liability Accounts Payable + v X sales increase % Accruals 900000 15% 135000 Increase in retained Liability = Sales in 2017 9660000 144900 X Net profit Margin X 6% X Retention Ratio X 25% Using above mentioned AFN formula, we get AFN 620100 $ Hence, AFN is 620100 $ The capital intensity ratio is measured a Ao/So. Broussard's current capital intensity ratio is higher than that of the firm with $7 million year-end 2018 assets; therefore, Broussard is more Capital intensive - it would require a larger increase in total assets to suppport the increase in sales.