Broussard’s Skateboard’s sales are expected to increase by 15% from $8 million i

Question

Broussard’s 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. What would be the additional funds needed if the company’s year-end 2013 assets had been $7 million? Assume that all other numbers, including sales, and the company is operating at full capacity. Why is this AFN different from the one you found earlier? Is the company’s “capital intensity” ratio the same or different?

Explanation / Answer

SALES EXPECTED IN 2014

=$9200,000

AFTER-TAX PROFIT MARGIN

($9200000*6%)=$552000

DIVIDEND PAYMENTS [$552000*40%]=$220800

ADDITION TO RETAINED EARNINGS [$552000 - $220800]=$331200

ALL THE PROFITS AFTER THE PAYMENT OF DIVIDEND WILL BE AN ADDITION TO RETAINED EARNINGS. AS THE ASSETS ARE ALREADY AT FULL CAPACITY, ALL THE ASSETS SHOULD GROW AT THE SALES RATE. IT IS TO BE NOTED THAT IF THE ASSETS WERE NOT AT FULL CAPACITY, ONLY THE SPONTANEOUS ASSETS WOULD INCREASE.

INCREASE IN ASSETS = $5000000*15%=$750000

INCREASE IN LIABILITIES = [$450000+$450000]*15%=$135000

FOR CURRENT LIABILITIES, ONLY THE ACCOUNTS PAYABLE AND ACCRUALS ARE TREATED ASSPONTANEOUS LIABILITIES. NOTES PAYABLE IS NOT CONSIDERED SPONTANEOUS FOR AFN CALCULATION.

AFN = INCREASE IN ASSETS - INCREASE IN LIABILITIES - ADDITION TO RETAINED EARNINGS

$750000 - $135000 - $331200=$283800

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IF THE COMPANY'S YEAR END 2013 ASSETS HAD BEEN $7 MILLION

INCREASE IN ASSETS = $7000000*15%=$1050000

ALL OTHER CALCULATION WILL BE SAME AS ABOVE.

AFN = INCREASE IN ASSETS - INCREASE IN LIABILITIES - ADDITION TO RETAINED EARNINGS

$1050000 - $135000 - $331200

=$583800

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AFN IS DIFFRENT FROM THE ONE EARLIER FOUND BECAUSE AS THE BROUSSARD'S ASSET IS $7 MILLION IT NEED MORE ASSETS TO COPE UP WITH THE SALES INCEREASE, SO THE ADDITIONAL FUND NEEDED INCEREASED ACCORDINGLY.

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CAPITAL INTENSITY RATIO YEAR 2013

= TOTAL ASSET / SALES

= $5000000 / $8000000

= 0.625

CAPITAL INTENSITY RATIO YEAR 2014

= TOTAL ASSET / SALES

= $5750000 / $9200000

= 0.625

CAPITAL INTENSITY RATIO IS SAME.

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