Additional funds needed
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(12-1)
Baxter Video Product'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 and $250,000 accruals. The after-tax 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.
(12-2)
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 in 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?
(12-3)
Refer to Problem 12-1. Return to the assumption that the company had $3 million in assets at the end of 2010, but now assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Why is this AFN different from the one you found in Problem 12-1?
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The solution explains how to calculate the amount of additional funds needed
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