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Homework answers / question archive / The AFN Equation AFN EQUATION Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%

The AFN Equation AFN EQUATION Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%

Finance

The AFN Equation 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 $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 $250,000 of accrued liabilities. Its profit margin is forecasted to be 5%. Assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent. _______$

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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 5.00%

= $300,000

Additions to Retained Earnings

Here, the company is not paying any dividend for the year, therefore, the additions to the Retained Earnings will be $300,000.

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

= $600,000 - $100,000 - $300,000

= $200,000

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