Question
Ivana Company's (the Company) sales are expected to increase from $10million in 2018 to $12million in 2019. Its assets totaled $6million at the end of
Ivana Company's ("the Company") sales are expected to increase from $10million in 2018 to $12million in 2019. Its assets totaled $6million at the end of 2018. The Company is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2018, current liabilities are $2million, consisting of $500,000 accounts payable, $1million of notes payable, and $500,000 of accrued liabilities. Its profit margin is forecasted to be 5%, and the forecasted dividend payout ratio is 70%.
Required:
a. Based on information above, calculate the additional funds the Company will need for 2019. (5 marks)
b. Suppose at the end of 2018 the Company's assets had been $8million, and assuming that all other numbers are the same, calculate the AFN again for the Company in 2019. Why is this AFN different from the one you calculated in (a) above? Is the Company's "capital intensity" the same or different? Explain. (7 marks)
c. Back to the original information above, and now suppose the Company is operating at 95% capacity during 2018 and all other numbers are the same. Considering the excess capacity adjustments, calculate the AFN for the Company in 2019. (10 marks)
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