Question

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 $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 3%, 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 $3 million at the end of 2016. Is the company's "capital intensity" the same or different comparing to initial situation?
-Select-DifferentThe same

Answer 1

Additional Funds Needed [AFN] if the total asset is $5 Million

• Expected Next Year Sales = $60,00,000
• After Tax profit Margin = $180,000 [$60,00,000 x 3%]
• Therefore, Additions to Retained Earnings will be $72,000 [$180,000 x 40%]
• Increase in Assets = $10,00,000 [$50,00,000 x 20%]
• Increase in Liabilities = $100,000 [($250,000 + $250,000) x 20%]

• Additional Funds Needed [AFN]

Additional Funds Needed [AFN] = Increase in Assets – Increase in Liabilities – Additions to retained earnings

= $10,00,000 - $100,000 - $72,000

= $828,000

Additional Funds Needed [AFN] if the total asset is $5 Million = $828,000

Additional Funds Needed [AFN] if the total asset were $3 Million

• Expected Next Year Sales = $60,00,000
• After Tax profit Margin = $180,000 [$60,00,000 x 3%]
• Therefore, Additions to Retained Earnings will be $72,000 [$180,000 x 40%]
• Increase in Assets = $600,000 [$30,00,000 x 20%]
• Increase in Liabilities = $100,000 [($250,000 + $250,000) x 20%]

• Additional Funds Needed [AFN]

Additional Funds Needed [AFN] = Increase in Assets – Increase in Liabilities – Additions to retained earnings

= $6,00,000 - $100,000 - $72,000

= $428,000

Additional Funds Needed [AFN] if the total asset is $5 Million = $428,000

DECISION

The additional funds needed would be $828,000 If the total asset were $5 Million and the additional funds needed would decrease to $428,000 if the asset totalled is $3 Million