Question

Problem 12-02
AFN equation

Broussard Skateboard's sales are expected to increase by 25% from $8.2 million in 2016 to $10.25 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 60%. 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 $6 million in total assets at the end of 2016. The identical firm's capital intensity ratio (A₀*/S₀) is

Select (only one)-

higher than, lower than, or equal to

Item 2 than Broussard's; therefore, the identical firm is

Select (only one)-

less, more, or the same

Item 3 capital intensive - it would require

Select (only one)-

a smaller, a larger, or the same

Item 4 increase in total assets to support the increase in sales.

Answer 1

	Amt($)
Last year's Sales	$8,200,000.00	S0
Sales growth rate	25%	g
Increase in sales	$2,050,000.00	= s0*g
Current Year's sales	$10,250,000.00	S1
Assets in 2016	$5,000,000.00	A0
ratio of assets to sales	60.98%	A0/S0
Increase in Assets to support increase in sales	$1,250,000.00	*(A0/S0)
Current Liabilities 2016	$1,400,000.00	L0
ratio of assets to sales	17.07%	L0/S0
Increase in Current Liabilities to support increase in sales	$350,000.00	*(L0/S0)
Profit Margin	5%	M
Profit in 2016	$410,000.00	S0*M
dividend ratio	60%	d0
Profit Retention ratio	40%	b0= 1-d0
Retained Earnings in 2016	$164,000.00	S0*M*b
Retained earnings in 2017	$205,000.00	S1*M*b
AFN	$695,000.00	Increase in Assets - Increase in Liabilities - Retained Earnings

Ans 1 The Capital intensity ratio A0/S0 for identical firm is Higher than Brousard
Ans 2 The identical Firm is more Capital Intensive than Bousard
Ans 3 It would require larger increase in total assets to support the increase in sales
Explanation

Identical Firm
2016 Sales	$8,200,000.00	S0
2016 Assets	$6,000,000.00	A0
Identical Firm's capital intensity ratio	73.17%	A0/S0
Brousard's capital intensity ratio	60.98%

Identical firm has assets of $ 6 million to support sales of $8.2 million, on the other hand Bousard has Assets of $5m to support identical sales.