Question

The Booth Company’s sales are expected to increase by 15% from $8 million in 2015 to $9.2 million in 2016. Its assets totaled $7 million at the end of 2015. The company is already operating 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 6%, and the forecasted payout ratio is 40%.

a) Use the AFN equation to forecast the Booth Company’s additional funds needed for the coming year.

b) If Booth’s 2018-year end assets were $5 million, would the company’s capital intensity ratio be same or different? Why?

Show your workings.

Answer 1