In: Accounting
Carlsbad Corporation's sales are expected to increase from $5 million in 2019 to $6 million in 2020, or by 20%. Its assets totaled $4 million at the end of 2019. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2019, 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 3%.
choose one
Additional Funds Needed [AFN] 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 3.00%
= $180,000
Additions to Retained Earnings
Here, the company is not paying any dividend for the year, therefore, the additions to the Retained Earnings will be $180,000.
Increase in Total Assets
Increase in Total Assets = Total Assets x Percentage of Increase in sales
= $4,000,000 x 20%
= $800,000
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
= $800,000 - $100,000 - $180,000
= $520,000.
Hence, the additional funds needed for the coming year will be $520,000.
Reason for difference in the AFN from the one when the company pays dividends
(III)- Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of additional funds needed.