Hale Corporation’s sales are expected to increase from $5 million in 2016 to $6
ID: 2730718 • Letter: H
Question
Hale Corporation’s sales are expected to increase from $5 million in 2016 to $6 million is 2017, or by 20%. Its assets totaled $3 million at the end of 2016. Hale Corporation is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2016, 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 30%. Use the AFN equation to forecast the additional funds Hale Corporation will need for the coming year.
Explanation / Answer
Where,
Ao = current level of assets
S/So = percentage increase in sales i.e. change in sales divided by current sales
Lo = current level of liabilities
S1 = new level of sales
PM = profit margin
b = retention rate = 1 – payout rate
AFN = 3*20% - 1*20%*6*3%*30% = $ 0.0492 million
AFN = $ 49,200
Additional Funds Needed = Ao × S Lo × S × S1 × PM × b So SoRelated Questions
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