Question

 

12.1 Broussard Skateboard’s sales are expected to increase by 15% from $8millionin 2013 to$ 9.2 million in 2014. Its assets totaled $5million 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 .Theafter- tax profit marginis forecasted to be 6%, and the forecasted pay out ratio is 40%. Use the AFN equation to forecast Broussard’s additiona lfunds needed for the coming year.

12.2 Refe rto Problem 12-1. 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, are the same as in Problem12-1 and that the company is operating at full capacity. Why is this AFN different from the one you found in Problem12-1? Is the company’s“ capital intensity” ratio the same or different?

Answer 1

12.1

Sales expected in 2014 = $9,200,000

After-tax profit margin ($9,200,000*6%) = $552,000

Dividend payments [$552,000*40%] = $220,800

Addition to retained earnings [$552,000 - $220,800] = $331,200

Note: All the profits after the payment of dividend will be an addition to retained earnings.

As the assets are already at full capacity, all the assets should grow at the sales rate. It is to be noted that if the assets were not at full capacity, only the spontaneous assets would increase.

Increase in assets = $5,000,000*15% = $750,000

Increase in liabilities = [$450,000+$450,000]*15% = $135,000

Note: For current liabilities, only the accounts payable and accruals are treated as spontaneous liabilities. Notes payable is not considered spontaneous for AFN calculation.

AFN = Increase in assets – Increase in liabilities – Addition to retained earnings

=$750,000 - $135,000 - $331,200 = $283,800

12.2

A* = $7 Mill, L* = 900,000, S= $8 Mill, ?S = $1.2 Mill

(A*/S)?S = ($7 Mill/$8 Mill)$1.2 Mill = $1,050,000

(L*/S)?S = ($900,000/$8 Mill)$1.2 Mill = $135,000

MS₁(1-pay out ratio) = $9.2 Mill x .06(1-.04) = $331,200

AFN = $1,050,000 - $135,000 - $331,200 = $583,800

The AFN is different from the one found in Problem 12-1 because the year ends assets are higher.

The company’s “capital intensity” ratio is different.