Question

Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $5 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%, and the forecasted retention ratio is 25%. Use the AFN equation to forecast Carlsbad's 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

. Now assume the company's assets totaled $3 million at the end of 2016. Is the company's "capital intensity" the same or different comparing to initial situation? (Different or the same)

Answer 1

Carlsbad's additional funds needed 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

Additions to Retained Earnings = After Tax profit Margin x Retention Ratio

= $300,000 x 25%

= $75,000

Increase in Total Assets

Increase in Total Assets = Total Assets x Percentage of Increase in sales

= $5,000,000 x 20%

= $1,000,000

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

= $1,000,000 - $100,000 - $75,000

= $825,000

“Hence, Carlsbad's additional funds needed for the coming year will be $825,000”