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

Carter Corporation's sales are expected to increase from $5 million in 2011 to $6 million in 2012, or by 20%. Its assets totaled $2 million at the end of 2011. Carter is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2011, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 3%, and the forecasted retention ratio is 45

AFN = (A*/S0)?S - (L*/S0)?S - MS1(RR) ==(($2,000,000/$5,000,000) *1,000,000) - (($500,000/$5,000,000)*1,000,000-0.03($6,000,0000)(0.45)=(0.4)($1,000,000) - (0.1)($1,000,000) - ($180,000)(0.45)=$400,000 - $100,000 - $81,000=$219,000.

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