Problem 9-2 AFN equation Broussard Skateboard\'s sales are expected to increase

Question

Problem 9-2 AFN equation Broussard Skateboard's sales are expected to increase by 15% from $8.8 million in 2015 to $10.12 million in 2016, Its assets totaled $6 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 3%, and the forecasted payout ratio is 65%, what would be the additional funds needed? Do not round intermediate calculations. Round your answer to the nearest dollar Assume that the company's year-end 2015 assets had been $2 million. Is the company's "capital intensity" ratio the same or different? Select I. The capital intensity ratio is measured as Ao*/So. Broussard's capital intensity ratio is higher than that of the firm with $2 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 Ao*/So. Broussard's capital intensity ratio is higher than that of the firm with $2 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 Ao /So. Broussard's capital intensity ratio is lower than that of the firm with $2 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 Ao*/So. Broussard's capital intensity ratio is lower than that of the firm with $2 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

Retention Ratio = 1 - payout ratio = 1 - 65% = 35%

AFN = (A*/S0)S – (L*/S0) S – M(S1)(RR) = $658,740

AFN = (A*/S0)S – (L*/S0) S – M(S1)(RR) A* $   6,000,000 All Assets $ Dollars S0 $   8,800,000 Sales 0 $ Dollars S $   1,320,000 S1 - S0 $ Dollars L* $      900,000 AP + Accurals $ Dollars M 3.0% Profit Margin % S1 $ 10,120,000 Sales 1 $ Dollars RR 35.0% Retention Ratio % Fund Reqd $ 900,000.00 Spontaneous $ 135,000.00 Retained $ 106,260.00 AFN $ 658,740.00

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