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

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 including notes payable =1000000*20% = 200000

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

AFN = 800000 - 200000 - 360000

AFN = $ 240,000

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