Broussard Skateboard's sales are expected to increase by 15% from $8.2 million in 2018 to $9.43 million in 2019. Its assets totaled $4 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 55%. 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 $5 million. Is the company's "capital intensity" ratio the same or different? The capital intensity ratio is measured as A0*/S0. Broussard's current capital intensity ratio is that of the firm with $5 million year-end 2018 assets; therefore, Broussard is capital intensive - it would require increase in total assets to support the increase in sales.
Answer a.
2018:
Sales = $8,200,000
Total Assets = $4,000,000
Profit Margin = 6.00%
Retention Ratio = 1 - Payout Ratio
Retention Ratio = 1 - 0.55
Retention Ratio = 0.45
Spontaneous Current Liabilities = Accounts Payable +
Accruals
Spontaneous Current Liabilities = $450,000 + $450,000
Spontaneous Current Liabilities = $900,000
2019:
Sales = $9,430,000
Addition to Retained Earnings = Sales * Profit Margin *
Retention Ratio
Addition to Retained Earnings = $9,430,000 * 6.00% * 0.45
Addition to Retained Earnings = $254,610
Increase in Total Assets = $4,000,000 * 0.15
Increase in Total Assets = $600,000
Increase in Spontaneous Current Liabilities = $900,000 *
0.15
Increase in Spontaneous Current Liabilities = $135,000
Additional Fund Needed = Increase in Total Assets - Increase in
Spontaneous Current Liabilities - Addition to Retained
Earnings
Additional Fund Needed = $600,000 - $135,000 - $254,610
Additional Fund Needed = $210,390
Answer b.
The capital intensity ratio is measured as A0*/S0. Broussard’s capital intensity ratio ($4,000,000/$8,200,000) is lower than that of the firm with $5 million ($5,000,000/$8,200,000) 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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