Question

Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $2 million at the end of 2016. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2016, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 4%. a. Assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent. b. Why is this AFN different from the one when the company pays dividends? I. Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of assets needed. II. Under this scenario the company would have a higher level of spontaneous liabilities, which would reduce the amount of additional funds needed. III. Under this scenario the company would have a lower level of retained earnings, which would increase the amount of additional funds needed. IV. Under this scenario the company would have a lower level of retained earnings, which would decrease the amount of additional funds needed. V. Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of additional funds needed. -Select-

Answer 1

=250000+250000 AFN (A/SO)AS-(L/SO)AS-MS1(RR) A- Assets tied directly to sales $ 2,000,000 L-spontaneous liabilities that are affected by sales | $ 500,000 So the previous year's sales $ 5,000,000 Si total projected sales for next year $ 6,000,000 AS the change in sales between SO and Si $ 1,000,000 MS1 projected net income $ 240,000 RR the retention ratio from net income 100% 6000000-5000000 =6000000*4% =1-0% Additional funds needed (AFN): (2000000/5000000)x1000000-(500000/5000000)x1000000-6000000x4% 100% Correct option is "I option"

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