Question

Carlsbad Corporation's sales are expected to increase from $5 million in 2018 to $6 million in 2019, or by 20%. Its assets totaled $4 million at the end of 2018. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2018, 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%.

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 higher level of retained earnings, which would reduce the amount of assets needed.
   2. Under this scenario the company would have a higher level of spontaneous liabilities, which would reduce the amount of additional funds needed.
   3. Under this scenario the company would have a lower level of retained earnings, which would increase the amount of additional funds needed.
   4. Under this scenario the company would have a lower level of retained earnings, which would decrease the amount of additional funds needed.
   5. Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of additional funds needed.

Answer 1

	Carlsbad Corporation's
		2016	2017	% Change
	Sales	$ 5,000,000.00	$ 6,000,000.00	20%
	Total Assets	$ 4,000,000.00
	Total Liabilities	$ 1,000,000.00
	Accounts Payable	$      250,000.00
	Accrued Liabilties	$      250,000.00
	Notes Payable	$      500,000.00
	After Tax Profit Margin	3%
	Retention Ratio	100%
	Formula
	Additional Funds Needed=
	(Ao/So)*ΔS− (L*/S0) × ΔS-M(S1)RR
	A*=Current level of asets	$ 4,000,000.00
	So= sales	$ 5,000,000.00
	ΔS= Increase sales=($6000000-$5000000)	$ 1,000,000.00
	L*=Current level of liabilities=(Accounts Payable+Accrued Liabilities)=($250000+$250000)	$      500,000.00
	S1=New Level of sales	$ 6,000,000.00
	M=Profit Margin	3%
	RR=Retention Rate=1-Payout Rate	100%
	(A*/So)*ΔS=($4000000/$5000000)*$1000000	$      800,000.00
	(L*/So) ×ΔS=($500000/$5000000)*$1000000	$      100,000.00
	M(S1)RR=3%*$6000000*100%	$      180,000.00
	AFN=($800000-$100000-$180000)	$      520,000.00
1)	Note: Assume no change in financial ratios.
2)	Change in assets due to increase in Sales
3)	Change in liabilities due to change in Sales
4)	Retain earnings is deducted to calculate the AFN
5)	Retaintion ratio is 100% because no dividend declared by company.
6)	The Note Payable do not consiered because note payable do not vary automatically with sales.

Part C

This AFN is different from the one when the company pays dividends because:

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