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

Additional funds required = increase in assets-increase in liabilities-increase in retained earnings

Increase in assets = $5 million * 20% = 1 million ------------(A)

Increase in liabilities = 1 million *20% = $200,000. -------------(B)

Increase in retained earnings = Increase in sales * profit margin * retention ratio

= $6,000,000*4%*30%

=$72,000 -------------(C)

Addtional funds required = A-B-C

=$1,000,000 - $200,000 - $72,000

=$728,000.

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