Question

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 $2 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 6%, 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 cent.

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Answer 1

Additional Funds Needed [AFN]

• Expected Next Year Sales = $60,00,000
• After Tax profit Margin = $360,000 [$60,00,000 x 6%]
• Therefore, Additions to Retained Earnings will be $108,000 [$360,000 x 30%]
• Increase in Assets = $400,000 [$20,00,000 x 20%]
• Increase in Liabilities = $100,000 [($250,000 + $250,000) x 20%]

• Additional Funds Needed [AFN]

Additional Funds Needed [AFN] = Increase in Assets – Increase in Liabilities – Additions to retained earnings

= $400,000 - $100,000 - $108,000

= $192,000

• “Therefore, the additional funds Carlsbad will need for the coming year would be $192,000”