AFN equation Carter Corporation\'s sales are expected to increase from $5 millio

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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 $2 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 3%.

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.
$  

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.

Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of additional funds needed.

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 $2 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 3%.

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.
$  

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.

Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of additional funds needed.

Explanation / Answer

AFN = increase in assets - increase in spontaneous current liabilities - retained earnings in 2013

= 20%*6,000,000 - (250,000+250,000)*20% - 3%*6,000,000

=1200000-100000-180000=920000$

Key things to note are: spontaneous current liabilities do not include notes payable. Retained earnings in 2013 = net income in 2013

This AFN is different from the one when the company pays dividends because:

1. 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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