AFN equation Carter Corporation\'s sales are expected to increase from $5 millio
ID: 2383983 • 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 $4 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 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 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
AFN = (A*/S0)?S - (L*/S0)?S - MS1(RR)
where A* = Assets tied directly to sales
L* = Liabilities that increase spontaneously (AP and accruals – not bank loans or bonds)
A*/S0 and L*/S0 – percentage of sales
S0=Sales last year
S1=Sales this year
?S = change in sales
M = profit margin
RR = retention ratio (1-dividend payout)
So AFN = (4/5)*(6-5) - (1/5)*(6-5) - 3%*6*35% = 0.537M = $537,000
AFN = increase in assets - increase in spontaneous current liabilities - retained earnings in 2013
If the company pays dividend then the AFN will be differ becase its libulities will be increased.
Under this scenario the company would have a lower level of retained earnings, which would increase the amount of additional funds needed.
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