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 4%, and the forecasted retention ratio is 35%. 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

2016:

Total Assets = $4,000,000

Spontaneous Current Liabilities = Accounts Payable + Accruals
Spontaneous Current Liabilities =$250,000 + $250,000
Spontaneous Current Liabilities = $500,000

2017:

Growth Rate = 20%
Sales = $6,000,000

Net Income = Sales * Profit Margin
Net Income = $6,000,000 * 4%
Net Income = $240,000

Additions to Retained Earnings = Net Income * Retention Ratio
Additions to Retained Earnings = $240,000 * 35%
Additions to Retained Earnings = $84,000

Increase in Total Assets = Total Assets, 2016 * Growth Rate
Increase in Total Assets = $4,000,000 * 20%
Increase in Total Assets = $800,000

Increase in Spontaneous Current Liabilities = Spontaneous Current Liabilities, 2016 * Growth Rate
Increase in Spontaneous Current Liabilities = $500,000 * 20%
Increase in Spontaneous Current Liabilities = $100,000

Additional Fund Needed = Increase in Total Assets - Increase in Spontaneous Current Liabilities - Additions to Retained Earnings
Additional Fund Needed = $800,000 - $100,000 - $84,000
Additional Fund Needed = $616,000