Broussard is already at full capacity, so its assets must grow at the same rate

Question

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, S500,000 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%. Use the AFN equation to forecast Broussard's additional funds needed for the coming year. 12-2). AFN Equation Refer to Problem 12-1. What would be the additional funds needed if the company's year-end 2016 assets had been S7 million Assume that all other numbers, including sales, are the same as in Problem 12-1 and that the company is operating at full capacity. Why is this AFN different from the one you found in Problem 12-1? Is the company's "capital intensity" ratio the same or different? 12-3). AFN Equation Refer to Problem 12-1. Return to the assumption that the company had $5 million in assets at the end of 2016, 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 you found in Problem 12-1?

Explanation / Answer

12-2.

AFN = Increase in Assets - Increase in Liabilities - Increase in retained Earnings

= 2016 assets × sales growth rate
= $7 million × 15%
= $1.05 million

= 2016 liabilities × sales growth rate
= $0.9 million × 15%
= $0.135 million

= 2017 sales × profit margin × retention rate
= 2016 sales × (1 + sales growth rate) × profit margin × retention rate
= $8 million × (1 + 15%)×6%×60%

= $0.3312 million

Additional Funds Needed
= $1.05 million – $0.135million ? $0.3312 million

= $0.5838 million

=$583800

The AFN is different from the one found as per 12-1 because as per 12-2 more assets have been used to generate the same revenue in the year 2016 so for the coming year also AFN would be more as compared to 12-1.

Capital Intensity Ratio = Total Assets / Total Sales

For 12-1 = $5 Million / $8 Million

= 0.625

For 12-2 = $7 Million / $8 Million

= 0.875

As seen from above, the company's Capital Intensity Ratio is different.

A higher capital intensity ratio for a company means that the company needs more assets than a company with lower ratio to generate equal amount of sales.

12-3

AFN = Increase in Assets - Increase in Liabilities - Increase in retained Earnings

Increase in Assets
= 2016 assets × sales growth rate
= $5 million × 15%
= $0.75 million

Spontaneous Increase in Liabilities
= 2016 liabilities × sales growth rate
= $0.9 million × 15%
= $0.135 million

Increase in Retained Earnings
= 2017 sales × profit margin × retention rate
= 2016 sales × (1 + sales growth rate) × profit margin × retention rate
= $8 million × (1 + 15%)×6%×100%

= $0.552 million

Additional Funds Needed
= $0.75 million – $0.135million ? $0.552 million

= $0.063 million

=$63000

The AFN is different as compared to 12-1, because here the company has decided to retain its 100% profits & therefore the funds to be raised from would reduce.

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