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%. 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. $ Why is this AFN different from the one when the company pays dividends? Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of assets needed. Under this scenario the company would have a higher level of spontaneous liabilities, which would reduce the amount of additional funds needed. Under this scenario the company would have a lower level of retained earnings, which would increase the amount of additional funds needed. Under this scenario the company would have a lower level of retained earnings, which would decrease the amount of additional funds needed. Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of additional funds needed.
Additional Funds Needed [AFN] for the coming year
Expected Next Year Sales = $6,000,000
After Tax profit Margin
After Tax profit Margin = Expected Next Year Sales x Profit Margin
= $6,000,000 x 4.00%
= $240,000
Additions to Retained Earnings
Here, the company is not paying any dividend for the year, therefore, the additions to the Retained Earnings will be $240,000
Increase in Total Assets
Increase in Total Assets = Total Assets x Percentage of Increase in sales
= $2,000,000 x 20%
= $400,000
Increase in Spontaneous liabilities
Increase in Spontaneous liabilities = [Accounts Payable + Accruals] x Percentage of Increase in sales
= [$250,000 + $250,000] x 20%
= $500,000 x 20%
= $100,000
Additional Funds Needed [AFN]
Therefore, the Additional Funds Needed [AFN] = Increase in Total Assets – Increase in in Spontaneous liabilities – Additions to retained earnings
= $400,000 - $100,000 - $240,000
= $60,000
“Hence, the additional funds needed for the coming year will be $60,000”
Reason for difference in the AFN from the one when the company pays dividends
Under this scenario the company would have a higher level of retained earnings which would reduce the amount of additional funds needed.
Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in...
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 6%. Assume that...
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...
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AFN EQUATION 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%....
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Hello! This is all one question, thank you very much in advance! AFN EQUATION Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $3 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...
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