Question

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 $6 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 40%. Use the AFN equation to forecast Carlsbad's 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.

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Now assume the company's assets totaled $4 million at the end of 2016. Is the company's "capital intensity" the same or different comparing to initial situation?

Answer 1

Additional Funds Needed = A0 x S% - L0 x S% - S1 x PM x b

A0	6,000,000	Current level of assets
L0	1,000,000	Current level of Liabilities
S0	5,000,000	Current Sales
S1	6,000,000	Projected Sales
S%	20%	Change in Sales
PM	5%	Profit Margin
b	40%	retention rate
	880,000.00	Additional Funds Needed

In case the assets is $.4m, then AFN will be:

A0	4,000,000	Current level of assets
L0	1,000,000	Current level of Liabilities
S0	5,000,000	Current Sales
S1	6,000,000	Projected Sales
S%	20%	Change in Sales
PM	5%	Profit Margin
b	40%	retention rate
	480,000.00	Additional Funds Needed