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 $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 6%.

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.
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Explanation / Answer

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 6%.

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.

Answer

Next Year Net income = Next year Sale * after-tax profit margin

Next Year Net income = 6000000*6%

Next Year Net income = $ 360,000

Next year dividend = 0

Addition to retained earning = $ 360,000

Increase in Asset next year = 4000000*20%

Increase in Asset next year = 800000

Increase in Current Liabilty excluding notes payable = (250000 + 250000)*20% = 100000

AFN = Increase in Asset next year - Increase in Current Liabilty excluding notes payable - Addition to retained earning

AFN = 800000 - 100000 - 360000

AFN = $ 340,000

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