In: Finance
Broussard Skateboard's sales are expected to increase by
15% from $8.0 million in 2016 to $9.20 million in 2017. Its assets
totaled $5 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 4%, and the forecasted payout ratio is 55%. What
would be the additional funds needed? Do not round intermediate
calculations. Round your answer to the nearest dollar.
$
Assume that an otherwise identical firm had $6 million in total assets at the end of 2016. The identical firm's capital intensity ratio (A0*/S0) is -Select-higher than, lower than, or equal to than Broussard's; therefore, the identical firm is -Select-less,more, or the same capital intensive - it would require -Select-a smaller,a larger, or the same increase in total assets to support the increase in sales.
Additional Funds Needed [AFN] for the coming year
Expected Next Year Sales = $9,200,000
After Tax profit Margin
After Tax profit Margin = Expected Next Year Sales x Profit Margin
= $9,200,000 x 4%
= $368,000
Dividend Pay-out
Dividend Pay-out = After Tax profit Margin x Dividend Pay-out Ratio
= $368,000 x 55%
= $202,400
Additions to Retained Earnings
Additions to Retained Earnings = After Tax profit Margin - Dividend Pay-out
= $368,000 - $202,400
= $165,600
Increase in Total Assets
Increase in Total Assets = Total Assets x Percentage of Increase in sales
= $5,000,000 x 15%
= $750,000
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
= $750,000 - $135,000 - $165,600
= $449,400
“Hence, the Additional Funds Needed (AFN) will be $449,400”
Assume that an otherwise identical firm had $6 million in total assets t the end of 2016, 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.