Broussard Skateboard\'s sales are expected to increase by 20% from $7.0 million

Question

Broussard Skateboard's sales are expected to increase by 20% from $7.0 million in 2015 to $8.40 million in 2016. Its assets totaled $5 million at the end of 2015. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2015, 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 5%, 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.
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Assume that the company's year-end 2015 assets had been $4 million. Is the company's "capital intensity" ratio the same or different?
-Select-IIIIIIIVItem 2
I. The capital intensity ratio is measured as A0*/S0. Broussard's capital intensity ratio is higher than that of the firm with $4 million year-end 2015 assets; therefore, Broussard is less capital intensive - it would require a smaller increase in total assets to support the increase in sales.
II. The capital intensity ratio is measured as A0*/S0. Broussard's capital intensity ratio is higher than that of the firm with $4 million year-end 2015 assets; therefore, Broussard is less capital intensive - it would require a larger increase in total assets to support the increase in sales.
III. The capital intensity ratio is measured as A0*/S0. Broussard's capital intensity ratio is lower than that of the firm with $4 million year-end 2015 assets; therefore, Broussard is more capital intensive - it would require a larger increase in total assets to support the increase in sales.
IV. The capital intensity ratio is measured as A0*/S0. Broussard's capital intensity ratio is lower than that of the firm with $4 million year-end 2015 assets; therefore, Broussard is more capital intensive - it would require a smaller increase in total assets to support the increase in sales.

Explanation / Answer

Broussard Skateboard's sales are expected to increase by 20% from $7.0 million in 2015 to $8.40 million in 2016. Its assets totaled $5 million at the end of 2015. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2015, 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 5%, 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.

Increase in Assets = 5,000,000**20% = 1,000,000

Increase in current potential Liability = (AccountsPayable + Accrual)*20%

Increase in current potential Liability = (450000+450000)*20%

Increase in current potential Liability = 180000

Total Fund Needed = Increase in Assets - Increase in current potential Liability

Total Fund Needed = 1000000 - 180000

Total Fund Needed = $ 820,000

After Tax Profit Next year = 8,400,000*5%

After Tax Profit Next year = $ 420,000

Payout ratio = 55%

Addition to Retained Earning next year = After Tax Profit Next year *(1-Payout ratio)

Addition to Retained Earning next year = 420000*(1-55%)

Addition to Retained Earning next year = $ 189000

Additional funds needed = Total Fund Needed - Addition to Retained Earning next year

Additional funds needed = 820000-189000

Additional funds needed = $ 631,000

Assume that the company's year-end 2015 assets had been $4 million. Is the company's "capital intensity" ratio the same or different?

I. The capital intensity ratio is measured as A0*/S0. Broussard's capital intensity ratio is higher than that of the firm with $4 million year-end 2015 assets; therefore, Broussard is less capital intensive - it would require a smaller increase in total assets to support the increase in sales.

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