Question

1.

Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $3 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%.

1. Assume that the company pays no dividends.
   Under these assumptions, what would be the 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.
   $
2. 
   
3. Why is this AFN different from the one when the company pays dividends?
   
   1. Under this scenario the company would have a lower level of retained earnings, which would decrease the amount of additional funds needed.
   2. Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of additional funds needed.
   3. Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of assets needed.
   4. Under this scenario the company would have a higher level of spontaneous liabilities, which would reduce the amount of additional funds needed.
   5. Under this scenario the company would have a lower level of retained earnings, which would increase the amount of additional funds needed.
   
   -Select of the the above

2.

Austin Grocers recently reported the following 2016 income statement (in millions of dollars):

	Sales	$700
	Operating costs including depreciation	500
	EBIT	$200
	Interest	40
	EBT	$160
	Taxes (40%)	64
	Net income	$96
	Dividends	$32
	Addition to retained earnings	$64

For the coming year, the company is forecasting a 30% increase in sales, and it expects that its year-end operating costs, including depreciation, will equal 60% of sales. Austin's tax rate, interest expense, and dividend payout ratio are all expected to remain constant.

1. What is Austin's projected 2017 net income? Enter your answer in millions. For example, an answer of $13,000,000 should be entered as 13. Round your answer to two decimal places.
   $ ??????million
2. 
   
3. What is the expected growth rate in Austin's dividends? Do not round your intermediate calculations. Round your answer to two decimal places.
   ??? %

Answer 1

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 4%

= $240,000

Additions to Retained Earnings

Here, the company is not paying any dividend for the year, therefore, the additions to the Retained Earnings will be $240,000

Increase in Total Assets

Increase in Total Assets = Total Assets x Percentage of Increase in sales

= $3,000,000 x 20%

= $600,000

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

= $6000,000 - $100,000 - $240,000

= $260,000

“Hence, the additional funds needed for the coming year will be $260,000”

Reason for difference in the AFN from the one when the company pays dividends

(II)-Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of additional funds needed.