Question

Problem 12-02
AFN equation

Broussard Skateboard's sales are expected to increase by 15% from $8.0 million in 2016 to $9.20 million in 2017. Its assets totaled $6 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 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 $7 million in total assets at the end of 2016. The identical firm's capital intensity ratio is (greater than\less than\ equal to)than Broussard's; therefore, the identical firm is (less\more\the same) capital intensive - it would require a (smaller\larger\the same) increase in total assets to support the increase in sales.

Answer 1

a.

AFN = Increase in assets-Increase in spontaneous liabilities -Retained earnings

Percentage increase in sales= 15%

Increase in Total Assets = Total Assets x Percentage of Increase in sales

Increase in assets =6000000*15% =900000

Increase in Spontaneous liabilities = [Accounts Payable + Accruals] x Percentage of Increase in sales

Increase in spontaneous liabilities= (450000+450000)*15%=135000

retention ratio= 1-payout ratio=1-55%=45%

2017 retained earnings= net income margin* sales* retention ratio

6%*9200000*45%=248400

AFN= 900000-135000-248400

AFN =$516,600

b.

the identifical firms capitacl intensity ratio is greater than broussards:

the idenical firm is more capital intensive

it would require a larger increase in total assets to support the increase in sales.