Problem 12-02 AFN equation Broussard Skateboard\'s sales are expected to increas

Question

Problem 12-02 AFN equation Broussard Skateboard's sales are expected to increase by 15% from $8.6 million in 2016 to $9.89 million in 2017, Its assets totaled $5 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the 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 6%, and the forecasted payout ratio is 60% what would be the additional funds needed? Do not round intermediate calculations. Round your answer to he nearest do a Assume that an otherwise identical firm had $3 millin in total assets at the end of 2016. Broussard's capital intensity ratio (Ao*/So) is -Select-than the otherwise identical firm; therefore, Broussard is -Select- capital intensive it would require Select- increase in total assets to support the increase in sales.

Explanation / Answer

Required Change in assets = Assets* Change in sales =5,000,000*15% = 750000

Change in spontaneous liabilities (excluding notes payables) = Spontaneous liabilities * Change in sales

= (1400,000-500,000)*15%

= 135000

Profits retained = Profit margin*Sal es * (1-Payout ratio)

= 6%*9890,000* (1-0.6)

= 237360

Additional funds needed = Required Change in assets- Change in spontaneous liabilities- Profits retained

= 750000-135000-237360

=377640

Capital Intensity ratio = Assets/ Sales = 5 million/ 8.6 million

= 0.5814

So it is more capital intensive (Since it uses more assets 5million rather than 3 million of identical firm)

So it will require higher increase in total assets to support increase in sales.

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