Question

Broussard Skateboard's sales are expected to increase by 15% from $8.4 million in 2016 to $9.66 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 5%, 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 an otherwise identical firm had $2 million in total assets at the end of 2016. Broussard's capital intensity ratio (A0*/S0) is (higher/lower/same) is than the otherwise identical firm; therefore, Broussard is (less/more/same) capital intensive - it would require(smaller/larger/same)increase in total assets to support the increase in sales.

Answer 1

Sales in 2017 = 9,660,000

Net Profit =0.05*9,660,000 = $483,000

Dividend payout =0.55*483,000 = $265,650

Retained earnings = 483000 - 265650 = $217,350

Increase in assets =0.15*5,000,000 = 750,000

Only spontaneous liabilties increase which is accounts [payable and accrual = 450,000 +450,000 = 900,000.

So increase in liabilties = 900,000*0.15 = 135,000

AFN = Increase in Assets- Increase in liabilties - Addition to retained earnings

AFN = 750,000-135,000-217,350 = 397,650

AFN (Additional funds needed) =$397,650

Broussard's capital intensity ratio (A0*/S0) is higher is than the otherwise identical firm; therefore, Broussard is more capital intensive - it would require larger increase in total assets to support the increase in sales.