AB Broussard Skateboards sales are expected to increase by 2

AB

Broussard Skateboard\'s sales are expected to increase by 25% from $7.8 million in 2016 to $9.75 million in 2017. Its assets totaled $6 million at the end of 2016. Broussard is already at full capacity, so
its assets must grow at the same rate as projected sales. At the end of 2016, 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 7%, 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 an otherwise identical firm had $3 million in total assets at the end of 2016. Broussard\'s capital intensity ratio (AO*/SO) is
Broussard is -Select- capital intensive - it would require -Select- increase in total assets to support the increase in sales.
-Select-
than the otherwise identical firm; therefore,

Solution

1. Increase in Assets = $6,000,000 x 0.25 = $1,500,000

Increase in Liabilities = (accounts payable + accruals) x 0.25

= ($450,000 + $450,000) x 0.25 = $900,000 x 0.25 = $225,000

Addition to Retained Earnings = Net Income - Dividend Payments

Sales Expected(2017) = $9,750,000

Profit Margin = Net Income / Sales

Net Income = Profit Margin x Sales

= 7% x $9,750,000 = $682,500

Addition to Retained Earnings = $682,500 - ($682,500 x 60%)

= $682,500 - $409,500 = $273,000

AFN = Increase in Assets - Increase in Liabilities - Addition to Retained Earnings

= $1,500,000 - $225,000 - $273,000 = $1,002,000

2). The AFN amount will be different because Broussard had more assets to begin with allowing the company to put more assets into production, increasing the AFN.

The capital intensity Ratio will be different as well, as this is total assets/ sales, and Broussard assets are more.