Question

AFN EQUATION Carlsbad Corporation's sales are epected to increase from $5 million in 2016 to $6 milion in 2017, or by 20%. Its asses totaled $5 milion at the end of 2016. Casbad is ac full capacity, so ies assets must grow in proportion to projected sais Ac the end of 2016 cut labiles are $1 milion, contng of $250,000 af accounts payable. s500,000 of notes payable, and $250,000 of accrued labilinies Its proft margin is forecasted to be 3%, and the forecasted retention ratio s 25% Use the AFN euation to forecast Carisbad's additional funds needed for the coming year Wirite out your answer cempleely. For example. 3 million should be emered as 5.00o.000. Round your answer to the nesrest cent Nw ame the comparny's asets totaled $3 milion at the end of 2016. ts the company's "capital ienity the seme or dferent comparing to initia souation one he s C h

Answer 1

Question 1

Given,

Sales for the year ended = $5,000,000

Assets at the year end 2016 = $5,000,000

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

Forecasted profit margin = 3%

Retention ratio = 25%

Increase in sales = ($6,000,000 - $5,000,000)/$5,000,000 $\times$ 100 = 20%

Computation of additional funds needed

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

=[($5,000,000/$5000,000)$\times$1,000,000] - [($1,000,000/$5,000,000)$\times$1,000,000] - [($6,000,000$\times$3%)$\times$25%]

= $1,000,000 - $200,000 - $45,000 = $755,000

Question 2

If assets are $3,000,000 additional funds needed is

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

=[($3,000,000/$5000,000)$\times$1,000,000] - [($1,000,000/$5,000,000)$\times$1,000,000] - [($6,000,000$\times$3%)$\times$25%]

= $355,000

Company's capital intensity changed from the initial solution