In: Finance
Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $5 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 7%, and the forecasted retention ratio is 45%. 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 $3 million at the end of
2016. Is the company's "capital intensity" the same or different
comparing to initial situation?
-Select-DifferentThe sameItem 2
Carlsbad's additional funds needed 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 7.00%
= $420,000
Additions to Retained Earnings
Additions to Retained Earnings = After Tax profit Margin x Retention Ratio
= $420,000 x 45%
= $129,000
Increase in Total Assets
Increase in Total Assets = Total Assets x Percentage of Increase in sales
= $5,000,000 x 20%
= $1,000,000
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
= $1,000,000 - $100,000 - $189,000
= $711,000
“Hence, Carlsbad's additional funds needed for the coming year will be $711,000”
If the company's assets totaled $3 million at the end of 2016. Then the company's capital intensity will be “DIFFERENT” as comparing to initial situation.