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.
$

NOTE THIS IMPORTANT INFO

Normally, you only include the liabilities that increase spontaneously with the increase in sales. That is, notes (bank loans) typically will not increase spontaneously with sales. However, in this problem, the author assumes that all current liabilities (including notes) will increase spontaneously with the increase in sales.

Explanation / Answer

Increase in assets = 20% (same proportion as sales)

so the amount of increase = growth factor*assets in 2012

= 0.2*$4 million = $0.8 million

Total current liabilities in 2012 = $1 million

Increase in liabilities = growth factor*liabilities in 2012 = 0.2*1 = $0.2 million.

Thus total fund will be required to pay for buying new assets (i.e increse in assets) and paying off increased liabilities

so amount = 0.8 million (increase in liabilities)+0.2 million (increase in liabilities in 2013) = $1.0 million

Now, assuming that the increased sales is all cash: so increased cash in 2013 = incremental sales = $6-$5 million = $1 million

Amount left after tax = 6% of sales i. e 6% of 6 million = $0.36 million

So additional funds needed = Increase in assets+increase in current liabilities - amount left after tax

= 0.8 million+0.2 million - 0.36 million = $0.64 million or $640,000

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