Question

Carlsbad Corporation's sales are expected to increase from $5 million in 2019 to $6 million in 2020, or by 20%. Its assets totaled $5 million at the end of 2019. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2019, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 6%, and the forecasted retention ratio is 30%. Use the AFN equation to forecast Carlsbad's additional funds needed for the coming year. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest dollar. $   Now assume the company's assets totaled $3 million at the end of 2019. Is the company's "capital intensity" the same or different comparing to initial situation? -Select-DifferentThe or sameItem

Answer 1

Carlsbad's additional funds needed for the coming year

Expected Next Year Sales = $6,000,000

After Tax profit Margin

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

= $6,000,000 x 6.00%

= $360,000

Additions to Retained Earnings

Additions to Retained Earnings = After Tax profit Margin x Retention ratio

= $360,000 x 30%

= $108,000

Increase in Total Assets

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

= $5,000,000 x 20%

= $1,000,000

Increase in Spontaneous liabilities

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

= [$250,000 + $250,000] x 20%

= $500,000 x 20%

= $100,000

Additional Funds Needed [AFN]

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

= $1,000,000 - $100,000 - $108,000

= $792,000

Hence, the Carlsbad’s additional funds needed for the coming year is $792,000.

Comparison of the capital intensity ratios

The capital intensity ratio for 2019

The capital intensity ratio for 2019 = Total assets / Total sales

= $5,000,000 / $5,000,000

= 1.00

The capital intensity ratio for 2016 if the total asset is $3.00 Million

The capital intensity ratio for 2016 = Total assets / Total sales

= $3,000,000 / $5,000,000

= 0.60

Therefore, if the company's assets totalled $3.00 million at the end of 2019, then the company's "capital intensity" will be “DIFFERENT” as comparing to the initial situation.

Hence, the correct answer choice is “DIFFERENT”