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Homework answers / question archive / Carter Corporation's sales are expected to increase from $5 million in 2008 to $6 million in 2009, or by 20%
Carter Corporation's sales are expected to increase from $5 million in 2008 to $6 million in 2009, or by 20%. Its assets totaled $3 million at the end of 2008. Carter is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2008, 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 5%, and the forecasted retention ratio is 30%.
Use the AFN equation to forecast the additional funds Carter will need for the coming year.
Provided:
Assets totalled = $3 million
Sales in 2008 = $5 million
Sales in 2009 = $6 million
Growth rate = 20%
Current liabilities = $1 million
Accounts payable = $250,000
Notes payable = $500,000
Accrued liabilities = $250,000
Profit margin = 5%
Forecasted retention ratio = 30%
Solution:
AFN = ((Assets totalledSales in 2008) × Current liabilities) − ((Notes payableSales in 2008) × Current liabilities) − (Profit margin × Sales in 2009 × Forecasted retention ratio)AFN = ((3,000,0005,000,000) × 1,000,000) − ((500,0005,000,000) × 1,000,000) − (0.05 × 6,000,000 × 0.3)AFN = (0.6 × 1,000,000) − (0.1 × 1,000,000) − (300,000 × 0.3)AFN = 600,000 − 100,000 − 90,000AFN = $410,000
