Question

Carlsbad Corporation's sales are expected to increase from $5 million in 2019 to $6 million in 2020, or by 20%. Its assets totaled $3 million at the end of 2019. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2019, 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%, and the forecasted retention ratio is 30%. Use the AFN equation to forecast the additional funds Carlsbad will need 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 dollar.

Answer 1

Answer:

AFN  $328,000

Explanation:

To forecast the additional funds needed it's necessary to use the following equation:

AFN = A0 + S1/S0 - L0 x S1/S0 - S1 x PM x b

Where :

A0 = Current Level of Assets

S1/S0 = Percentage Increase in sales

L0 = Current Level of Liabilities

S1 = New Level of Sales

PM = Profit Margin

b= Retention rate = 1 - payout rate

Final Value

AFN = A0 ($3,000,000) + S1/S0 (0,20) - L0 ($1,000,000)

x S1/S0 (0,20) - S1($ 6,000,000) x PM (0,04) x b (0,30) = $328,000

The additional funds needed is the amount of money that the company must raise to increase the level of asset to support

the new level of sales.

The above equation indicate the excess increase in assets over the increase in liabilities and retained earnings as a consequence of the new level of sales.