AFN equation Carter Corporation\'s sales are expected to increase from $5 millio
ID: 2383254 • Letter: A
Question
AFN equation
Carter Corporation's sales are expected to increase from $5 million in 2012 to $6 million in 2013, or by 20%. Its assets totaled $3 million at the end of 2012. Carter is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2012, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. The after-tax profit margin is forecasted to be 6%.
a. 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.
$ _____
b. Why is this AFN different from the one when the company pays dividends? Select one below
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.
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.
Explanation / Answer
Answer:a
AFN = (A*/S0)S - (L*/S0)S - MS1(1 - d)
(0.6)($1,000,000) - (0.1)($1,000,000) - 0.05($6,000,000)(1 - 0)
= $600,000 - $100,000 - $300,000
= $200,000.
Answer:b Under this scenario the company would have a higher level of retained earnings which would reduce the amount of additional funds needed.
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