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 7%.
- 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.
- Why is this AFN different from the one when the company pays
dividends?
- Under this scenario the company would have a higher level of
retained earnings, which would reduce the amount of additional
funds needed.
- Under this scenario the company would have a higher level of
retained earnings, which would reduce the amount of assets
needed.
- Under this scenario the company would have a higher level of
spontaneous liabilities, which would reduce the amount of
additional funds needed.
- Under this scenario the company would have a lower level of
retained earnings, which would increase the amount of additional
funds needed.
- Under this scenario the company would have a lower level of
retained earnings, which would decrease the amount of additional
funds needed.