Question

AFN equation

Broussard Skateboard's sales are expected to increase by 15% from $7.0 million in 2016 to $8.05 million in 2017. Its assets totaled $4 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 70%.

1. What would be the additional funds needed? Do not round intermediate calculations. Round your answer to the nearest dollar.
$

2. Assume that an otherwise identical firm had $5 million in total assets at the end of 2016. The identical firm's capital intensity ratio (A₀*/S₀) is

-Select- 1. higher than    2. lower than 3.equal to

than Broussard's; therefore,

3. the identical firm is

-Select- 1.less    2. more 3. the same capital intensive -

4. it would require

-Select- 1. a smaller    2. a larger 3. the same increase in total assets to support the increase in sales.

Answer 1

Additional Funds Needed [AFN] for the coming year

Expected Next Year Sales = $8,050,000

After Tax profit Margin

After Tax profit Margin = Expected Next Year Sales x Profit Margin

= $8,050,000 x 5.00%

= $402,500

Dividend Pay-out

Dividend Pay-out = After Tax profit Margin x Dividend Pay-out Ratio

= $402,500 x 70%

= $281,750

Additions to Retained Earnings

Additions to Retained Earnings = After Tax profit Margin - Dividend Pay-out

= $402,500 - $281,750

= $120,750

Increase in Total Assets

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

= $4,000,000 x 15%

= $600,000

Increase in Spontaneous liabilities

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

= [$450,000 + $450,000] x 15%

= $900,000 x 15%

= $135,000

Additional Funds Needed [AFN]

Therefore, the Additional Funds Needed [AFN] = Increase in Total Assets – Increase in in Spontaneous liabilities – Additions to retained earnings

= $600,000 - $135,000 - $120,750

= $344,250

“Hence, the Additional Funds Needed (AFN) will be $344,250”

Assume that an otherwise identical firm had $5 million in total assets at the end of 2018, Broussard's capital intensity ratio (A₀*/S₀) is “HIGHER” than the otherwise identical firm, Broussard is “MORE” capital intensive - it would require “A LARGER” increase in total assets to support the increase in sales.