9-6: Additional Funds Needed (AFN) Equation Method Problem 9-2 AFN equation Brou
ID: 2562827 • Letter: 9
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9-6: Additional Funds Needed (AFN) Equation Method Problem 9-2 AFN equation Broussard Skateboard's sales are expected to increase by 25% from $8.0 million in 2015 to $10.00 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 4%, and the forecasted payout ratio is 60%, 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 $3 million. Is the company's "capital intensity" ratio the same or different? I. The capital intensity ratio is measured as Ao/S0. Broussard's capital intensity ratio is lower than that of the firm with $3 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. 11. The capital intensity ratio is measured as Ao"iso. Broussard's capital intensity ratio is lower than that of the firm with $3 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. III. The capital intensity ratio is measured as A /So. Broussard's capital intensity ratio is higher than that of the firm with $3 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. IV. The capital intensity ratio is measured as Ao*/So. Broussard's capital intensity ratio is higher than that of the firm with $3 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.Explanation / Answer
Additional financing needed [AFN] = Increase in total assets-increase in spontaneous liabilities-Increase in retained earnings. Substituting values in the above equation, we have AFN = 6000000*25%-(450000+450000)*25%- 10000000*4%*40%= $ 1,115,000 Answer Note: Increase in total assets = 6000000*25% = 1500000 Increase in spontaneous liabilities (spontaneous liabilities include accounts payable and accruals) = (450000+450000)*25% = 225000 Increase in retained earnings: Projected sales for 2016 10000000 After tax profit at 4% 400000 Dividends at 60% 240000 Retention 160000 So AFN = 1500000-225000-160000 = $ 1,115,000
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