Question

Broussard Skateboard's sales are expected to increase by 20% from $8.0 million in 2018 to $9.60 million in 2019. Its assets totaled $5 million at the end of 2018.
Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2018, 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 3%, 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.
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Assume that the company's year-end 2018 assets had been $6 million. Is the company's "capital intensity" ratio the same or different?

The capital intensity ratio is measured as A0*/S0. Broussard's current capital intensity ratio is .......... that of the firm with $6 million year-end 2018 assets; therefore, Broussard is............... capital intensive - it would require............... increase in total assets to support the increase in sales.

Answer 1

Additional Funds Needed [AFN] for the coming year

Expected Next Year Sales = $96,00,000

After Tax profit Margin

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

= $96,00,000 x 3%

= $288,000

Dividend Pay-out

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

= $288,000 x 60%

= $172,800

Additions to Retained Earnings

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

= $288,000 - $172,800

= $115,200

Increase in Total Assets

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

= $50,00,000 x 20%

= $10,00,000

Increase in Spontaneous liabilities

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

= [$450,000 + $450,000] x 20%

= $900,000 x 20%

= $180,000

Additional Funds Needed [AFN]

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

= $10,00,000 - $180,000 - $115,200

= $704,800

“Hence, the Broussard’s Additional Funds Needed (AFN) for the coming year = $704,800

The capital intensity ratio is measured as A0*/S0. Broussard's current capital intensity ratio is “HIGHER THAN” that of the firm with $6 million year-end 2018 assets; therefore, Broussard is “MORE” capital intensive - it would require “A LARGER” increase in total assets to support the increase in sales.