Question

AFN EQUATION Carsbad Corporation's sales are expected to increase from $5 milion in 2016 to 56 mllon in 2017, or by 20%. Its assers totaled $6 million at the end of 2016. Calsbad is at full capacity, so its assets muat grew in proportion to propected sales. At the end of 2036. eurrent lablites are $1 milian, conaisting of $250.000 of accounts payable, $500.000 af nots payable, and $250.000 of acerued labilites. Is proft margin is forecasted to be 4% and the forecasted retentian ratio is 35% Use the AFN equation to farecest Carlsbad's addtional funds needed for the coming year wree out your answer completely For example, 5 million should be entered a 5,000.000 Round your ansuer to the nearest cent Now asume the company's assets totaled s4 min at the end of 2016 I the company's capal intensty the ame or dferent comparing to intal stuation

Answer 1

Question 1

Given,

Company's sales for 2016 = $5,000,000

Company's expected sales for 2017 = $6,000,000

Assets at end of 2016 = $6,000,000

Liabilities at the year end 2016 = $1,000,000

Forecasted profit margin = 4%

Forecasted retention ratio = 35%

Computation of additional funds required

AFN = (A/S₀)$\Delta$S - (L/S₀)$\Delta$S - MS₁(RR)

= [($6,000,000$\div$$5,000,000)$\times$1,000,000] - [($1,000,000$\div$$5,000,000)$\times$1,000,000] - [($6,000,000$\times$4%)$\times$35%]

= $1,200,000 - $200,000 - $84,000 = $916,000

Question 2

If company assets totalled $4,000,000 at the year end 2016

Additional funds required = (A/S₀)$\Delta$S - (L/S₀)$\Delta$S - MS₁(RR)

= [($4,000,000$\div$$5,000,000)$\times$1,000,000] - [($1,000,000$\div$$5,000,000)$\times$1,000,000] - [($6,000,000$\times$4%)$\times$35%]

= $516,000

Company's capital intensity is changed from initial solution.