Question

Broussard Skateboard's sales are expected to increase by 25% from $7.8 million in 2016 to $9.75 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 75%. 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 $4 million in total assets at the end of 2016. Broussard's capital intensity ratio (A₀*/S₀) is -select (higher than / lower than/ equal to) than the otherwise identical firm; therefore, Broussard is -Select-(less / more / the same) capital intensive - it would require -Select- (smaller / a larger /the same) increase in total assets to support the increase in sales.

Answer 1

1. Additional funds needed = Current assets * Increase in Sales - Spontaneous liabilities * increase in sales - Additions to retained earnings

Additional funds needed = 5000000 * 25% - 900000 * 25% - 9750000 * 6% * (1 - 0.75)

Additional funds needed = 1025000 - 146250

Additional funds needed = $878750

2. Assume that an otherwise identical firm had $4 million in total assets at the end of 2016. Broussard's capital intensity ratio (A₀*/S₀) is higher (Because assets are higher) than the otherwise identical firm; therefore, Broussard is more capital intensive - it would require a larger increase in total assets to support the increase in sales.

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