Additional funds needed if assets were higher in 2010 than original

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Question description

Refer to Problem 12-1. What would be the additional funds needed if the company’s year-end 2010 assets had been $4 million? Assume that all other numbers, including sales are the same as problem 12-1 and that the company is operating at full capacity. Why is this AFN different from the one you found in Problem 12-1? Is the company’s “capital intensity” ratio the same or different?

Problem 12 - 1 for reference

Baxter Video Products’s sales are expected to increase by 20% from $5 million in

2010 to $6 million in 2011. Its assets totaled $3 million at the end of 2010. Baxter

is already at full capacity, so its assets must grow at the same rate as projected sales.

At the end of 2010, current liabilities were $1 million, consisting of $250,000 of

accounts payable, $500,000 of notes payable, and $250,000 of accruals. The aftertax profit margin is forecasted to be 5%, and the forecasted payout ratio is 70%.

Use the AFN equation to forecast Baxter’s additional funds needed for the

coming year.

I did the math before and it appears that if the company had more assets it would need more additional funds. The question is somewhat confusing assuming my math is correct.

ORIGINAL problem 12-1 with 3million assets

AFN = (A0*/S0)ΔS – (L0*/S0)ΔS – (PM)(S1)(1 – payout rate)
AFN = ((3000000/5000000)(1000000)) - ((500000/5000000)(1000000)) - ((.05(6000000)(1-.7))
AFN = (600000) - (100000) - (90000)
AFN = 410000

Company having 4million in assets

AFN = (A0*/S0)ΔS – (L0*/S0)ΔS – (PM)(S1)(1 – payout rate)
AFN = ((4000000/5000000)(1000000)) - ((500000/5000000)(1000000)) - ((.05(6000000)(1-.7))
AFN = (800000) - (100000) - (90000)
AFN = 610000

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