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 $4 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 3%, and the forecasted retention ratio is 35%. 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

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

Where :

A0 = Current Level of Assets = $4,000,000

S1/S0 = Percentage Increase in sales = 20%

L0 = Current Level of Liabilities = $750,000 (Accounts Payable + Accrued Liabilities, As Note Payable is a non operating liability , it is not considered)

S1 = New Level of Sales = $6,000,000

PM = Profit Margin = 3%

b= Retention rate = 1 - payout rate = 35%

.

AFN = A0 ($4,000,000) x S1/S0 (0.20) - L0 ($750,000) x S1/S0 (0.20) - S1($ 6,000,000) x PM (0.04) x b (0.35)

= $4,000,000*0.20 - $750,000*0.20 - $6,000,000*0.04*0.35

= $566,000