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 $4 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 5%, and the forecasted retention ratio is 45%. Use the AFN equation to forecast the additional funds Carlsbad will need 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.

Answer 1

Additional funds needed (AFN) = [(Current level of assets * percentage increase in sales) - (Current level of Liabilities * percentage increase in sales) - (New sales * Profit margin * Retention Ratio)] Liabilities = Accounts Payable + Accruals AFN = [(4000000*20%)-(500000*20%)-((6000000*5%*(1-45%)))] AFN = [800000-100000-165000] AFN = 5 535,000/