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

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 $5 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%, and the forecasted retention ratio is 30%. Use the AFN equation to forecast Carter'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.

Explanation / Answer

Increase in Asset = 5 Million*20% = 1 Million

Increase in current liabilty = 1 Million * 20% = 0.20 Million

Addition to retained Earning = Next year sale * Profit margin * Retention ratio

Addition to retained Earning = 6 Million * 6% * 30% = 0.108 Million

AFN = Increase in Asset - Increase in current liabilty - Addition to retained Earning

AFN = 1 - 0.20 -0.108

AFN = 0.692 Million

AFN = $ 692,000

Answer

Carter's additional funds needed = $ 692,000

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