(12-1) Broussard Skateboard’s sales are expected to increase by 15% from $8 mill
ID: 2728602 • Letter: #
Question
(12-1) Broussard Skateboard’s sales are expected to increase by 15% from $8 million in 2013 to $9.2 million in 2014. Its assets totaled $5 million 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. 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) Refer to Problem 12-1. What would be the additional funds needed if the company’s yearend 2013 assets had been $7 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?
Explanation / Answer
Solution 12-1
We need to compute components of AFN equation first.
Addition to retained earnings = Sales x profit margin x (1- pay out ratio)
= 9,200,000 x 6% x (1-0.40)
= 331,200
Change in assets = current total assets x sales growth rate
= 5,000,000 x 15%
= 750,000
Increase in liabilities = liabilities x sales growth rate
= 1,400,000 x 15%
= 210,000
Additional financing needed = Change in assets - Increase in liabilities - Addition to retained earnings
= 750,000 – 210,000 -331,200
= 208,800
Therefore, additional financing needed would be 208,800.
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