I was trying to understand how everything worked on this site and did not realiz

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I was trying to understand how everything worked on this site and did not realize that someone's karma points hinged on my rating. I was sick for a few days and did not respond--inadvertently someone may have not received their karma points. I apologize for that and now understand this process. I'd really appreciate any help. Thank you.

Baxter Video Product’s sales are expected to increase by 20% from $5 million in 2010 to $6 million in 2011. Its assets totaled $3 million at the end of 2010. Baxter is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2010, current liabilities were $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accruals. The after tax profit margin is forecasted to be 5%,and the forecasted payout ratio is 70%. Use the AFN equation to forecast Baxter’s additional funds needed for the coming year.

Part B- What would be the additional funds needed if the year-end 2010 assets had been $4 million. Assume the company is operating at 100% capacity. Why is the AFN different that the first one? And, is the company’s capital intensity ratio the same or different?

Part C- Using the original scenario, assume the company pays no dividends. What would be the additional funds needed for the coming year? Why is the AFN different from the one found in Part B?

Explanation / Answer

So Addl Fund reqd is $0.51M = $510,000 Capital Intensity Ratio (CIR) is a Measure of a firm's efficiency in deployment of its assets, computed as a ratio of the total value of assets to sales revenue generated over a given period. Capital intensity indicates how much money is invested to produce one dollar of sales revenue. Formula: Capital Intensity Ratio = Total assets ÷ Sales revenue.
SO CIR = 4/5 = 0.8
Earlier CIR was 3/5 = 0.6. SO company's CIR has changed as Total assets reqd to produce same level of Sales has changed
AFN is different as Asset has changed. Part C: Orig Scenario
A* = Assets tied directly to sales and will increase : $3M & will grow by 20% to $3.6M
L* = Spontaneous liabilities that will be affected by sales. (NOTE: Not all liabilities will be affected by sales such as long-term debt) : $1M
S0 = Sales during the last year $5M
S1 = Total sales projected for next year (the new level of sales). $6M
?S = The increase in sales between S0 and S1 : $1M
M = Profit margin, or the profit per $1 of sales : 5% i.e (5% of $6M= $300k)
MS1 = Projected Net Income : 5% of $6M= $300k
RR = The retention ratio from Net Income and is also calculated as (1 - payout ratio) = (1-0%)= 100% ie (100% of $300K = $300k) The AFN equation is as follows:
AFN = (A*/S0)*?S - (L*/S0)*?S - MS1*(RR)

AFN =(3/5)*(6-5) - (1/5)*(6-5) - (6*5%)*(100%) = 0.10
So Addl Fund reqd is $0.10M = $100,000 AFN is different as Net Income is fully retained to finance operations. Capital Intensity Ratio (CIR) is a Measure of a firm's efficiency in deployment of its assets, computed as a ratio of the total value of assets to sales revenue generated over a given period. Capital intensity indicates how much money is invested to produce one dollar of sales revenue. Formula: Capital Intensity Ratio = Total assets ÷ Sales revenue.
SO CIR = 4/5 = 0.8
Capital Intensity Ratio (CIR) is a Measure of a firm's efficiency in deployment of its assets, computed as a ratio of the total value of assets to sales revenue generated over a given period. Capital intensity indicates how much money is invested to produce one dollar of sales revenue. Formula: Capital Intensity Ratio = Total assets ÷ Sales revenue.
Earlier CIR was 3/5 = 0.6. SO company's CIR has changed as Total assets reqd to produce same level of Sales has changed
AFN is different as Asset has changed. Part C: Orig Scenario
A* = Assets tied directly to sales and will increase : $3M & will grow by 20% to $3.6M
L* = Spontaneous liabilities that will be affected by sales. (NOTE: Not all liabilities will be affected by sales such as long-term debt) : $1M
S0 = Sales during the last year $5M
S1 = Total sales projected for next year (the new level of sales). $6M
?S = The increase in sales between S0 and S1 : $1M
M = Profit margin, or the profit per $1 of sales : 5% i.e (5% of $6M= $300k)
MS1 = Projected Net Income : 5% of $6M= $300k
RR = The retention ratio from Net Income and is also calculated as (1 - payout ratio) = (1-0%)= 100% ie (100% of $300K = $300k) The AFN equation is as follows:
AFN = (A*/S0)*?S - (L*/S0)*?S - MS1*(RR)

AFN =(3/5)*(6-5) - (1/5)*(6-5) - (6*5%)*(100%) = 0.10
So Addl Fund reqd is $0.10M = $100,000 AFN is different as Net Income is fully retained to finance operations. A* = Assets tied directly to sales and will increase : $3M & will grow by 20% to $3.6M
L* = Spontaneous liabilities that will be affected by sales. (NOTE: Not all liabilities will be affected by sales such as long-term debt) : $1M
S0 = Sales during the last year $5M
S1 = Total sales projected for next year (the new level of sales). $6M
?S = The increase in sales between S0 and S1 : $1M
M = Profit margin, or the profit per $1 of sales : 5% i.e (5% of $6M= $300k)
MS1 = Projected Net Income : 5% of $6M= $300k
RR = The retention ratio from Net Income and is also calculated as (1 - payout ratio) = (1-0%)= 100% ie (100% of $300K = $300k) The AFN equation is as follows:
AFN = (A*/S0)*?S - (L*/S0)*?S - MS1*(RR)

AFN =(3/5)*(6-5) - (1/5)*(6-5) - (6*5%)*(100%) = 0.10
So Addl Fund reqd is $0.10M = $100,000 AFN is different as Net Income is fully retained to finance operations. The AFN equation is as follows:
AFN = (A*/S0)*?S - (L*/S0)*?S - MS1*(RR)

AFN =(3/5)*(6-5) - (1/5)*(6-5) - (6*5%)*(100%) = 0.10
So Addl Fund reqd is $0.10M = $100,000 AFN is different as Net Income is fully retained to finance operations.

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