Question

Broussard Skateboard's sales are expected to increase by 25% from $9.0 million in 2015 to $11.25 million in 2016. Its assets totaled $5 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 5%, and the forecasted payout ratio is 70%. 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 2015 assets had been $2 million. Is the company's "capital intensity" ratio the same or different?

Answer 1

Asset value at end of 2016= $5 million*1.25% = $6.25 million( growth rate of asset has to be same)

Growth in asset needed is $1.25million

Profit in 2015 = 5%* $9 million= $0.45 million

The profit being ploughted back in business= 30% * $0.45 million( as payout ratio is 70%)= USD 135,000

Increase in current liability is 25%*$1.4million= USD 350,000

Additional funds needed = Increase in asset-increase in current liability-retained profit

=$1,250,000-$350,000-$135,000 = $765,000

Capital Intensity ratio = Asset/Sales

in 2015=2/9 = 0.2222

in 2016(asuming growth in 25%), since both asset and sales grow by same percentage the capital intensity ratio remains the same at 0.2222