Question

14. Broussard Skateboard’s sales are expected to increase by 15% from $8 million in 2013 to $9.2 million in 2014. Its assets totaled $5 million at the end of 2013. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2013, 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 40%. Answer the following questions.
    2. Use the AFN equation to forecast Broussard’s additional funds needed for the coming year.
    3. What would be the additional funds needed if the company’s year-end 2013 assets had been $7 million? Assume that all other numbers, including sales, remain the same. Why is the AFN different in this scenario? Is the company’s “capital intensity” ratio the same or different?
    4. Return to the assumption that the company had $5 million in assets at the end of 2013, but now assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Why is this AFN different from the one in part a?

Answer 1

a)

b)

c)

Under this scenario the company would have a higher level of retained earnings which would reduce the amount of additional funds needed