The Booth Company’s Sales

1. Additional Funds Needed
The Booth Company’s sales are forecasted to double from $1,000 in 2012 to $2,000 in 2013. Here is the December 31, 2012, balance sheet:
Cash $ 100 Accounts payable $ 50
Accounts receivable 200 Notes payable 150
Inventories 200 Accruals 50
Net fixed assets 500 Long-term debt 400
Common stock 100
Retained earnings 250
Total assets $1000 Total liabilities and equity $1000
Booth’s fixed assets were used to only 50% of capacity during 2012, but its current assets were at their proper levels in relation to sales. Spontaneous liabilities and all assets except fixed assets must increase at the same rate as sales, and fixed assets would also have to increase at the same rate if the current excess capacity did not exist. Booth’s after-tax profit margin is forecasted to be 7% and its payout ratio to be 70%. What is Booth’s additional funds needed (AFN) for the coming year? Round your answer to the nearest dollar.$

2. AFN equation
Broussard 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 55%. 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 2013 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 lower than that of the firm with $4 million year-end 2013 assets; therefore, Broussard is more 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 2013 assets; therefore, Broussard is less 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 A0*/S0. Broussard’s capital intensity ratio is higher than that of the firm with $4 million year-end 2013 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 2013 assets; therefore, Broussard is more capital intensive – it would require a larger increase in total assets to support the increase in sales.

3.AFN Equation Broussard Skateboard’s sales are expected to increase by 15% from $8 million in 2013 to $9.2 million in 2014. Its assets totaled $4 million at the end of 2013. Baxter 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 4%. Assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Do not round intermediate calculations. Round your answer to the nearest dollar.
$
Why is this AFN different from the one when the company pays dividends?

I. Under this scenario the company would have a lower level of retained earnings which would reduce the amount of additional funds needed.
II. Under this scenario the company would have a lower level of retained earnings but this would have no effect on the amount of additional funds needed.
III. Under this scenario the company would have a higher level of retained earnings which would reduce the amount of additional funds needed.
IV. Under this scenario the company would have a higher level of retained earnings which would increase the amount of additional funds needed.
V. Under this scenario the company would have a higher level of retained earnings but this would have no effect on the amount of additional funds needed.
4.Sales Increase
Maggie’s Muffins, Inc., generated $4,000,000 in sales during 2013, and its year-end total assets were $2,400,000. Also, at year-end 2013, current liabilities were $1,000,000, consisting of $300,000 of notes payable, $500,000 of accounts payable, and $200,000 of accruals. Looking ahead to 2014, the company estimates that its assets must increase at the same rate as sales, its spontaneous liabilities will increase at the same rate as sales, its profit margin will be 4%, and its payout ratio will be 70%. How large a sales increase can the company achieve without having to raise funds externally; that is, what is its self-supporting growth rate? Do not round intermediate steps. Round your answers to the nearest whole.
Sales can increase by $ , that is by %.
5.Long-Term Financing Needed
At year-end 2013, Wallace Landscaping’s total assets were $1.8 million and its accounts payable were $415,000. Sales, which in 2013 were $2.6 million, are expected to increase by 30% in 2014. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Wallace typically uses no current liabilities other than accounts payable. Common stock amounted to $470,000 in 2013, and retained earnings were $345,000. Wallace has arranged to sell $50,000 of new common stock in 2014 to meet some of its financing needs. The remainder of its financing needs will be met by issuing new long-term debt at the end of 2014. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its profit margin on sales is 4%, and 35% of earnings will be paid out as dividends.
1. What was Wallace’s total long-term debt in 2013? Round your answer to the nearest dollar.
$
What were Wallace’s total liabilities in 2013? Round your answer to the nearest dollar.
$
2. How much new long-term debt financing will be needed in 2014? (Hint: AFN – New stock = New long-term debt.) Round your answer to the nearest dollar.
$
6.Additional Funds Needed
The Booth Company’s sales are forecasted to double from $1,000 in 2012 to $2,000 in 2013. Here is the December 31, 2012, balance sheet:

Cash $ 100 Accounts payable $ 50
Accounts receivable 200 Notes payable 150
Inventories 200 Accruals 50
Net fixed assets 500 Long-term debt 400
Common stock 100
Retained earnings 250
Total assets $1000 Total liabilities and equity $1000

Booth’s fixed assets were used to only 50% of capacity during 2012, but its current assets were at their proper levels in relation to sales. Spontaneous liabilities and all assets except fixed assets must increase at the same rate as sales, and fixed assets would also have to increase at the same rate if the current excess capacity did not exist. Booth’s after-tax profit margin is forecasted to be 7% and its payout ratio to be 70%. What is Booth’s additional funds needed (AFN) for the coming year? Round your answer to the nearest dollar.

 

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