2. The AFN equation Aa Aa Cold Duck Manufacturing Inc. has the following end-of-

Question

2. The AFN equation Aa Aa Cold Duck Manufacturing Inc. has the following end-of-year balance sheet: Cold Duck Manufacturing Inc. Balance Sheet For the Year Ended on December 31 Assets Liabilities Current Assets: Current Liabilities: Cash and equivalents Accounts receivable Inventories $150,000 Acounts payable $250,000 150,000 100,000 $500,000 1,000,000 $1,500,000 Accrued liabilities 400,000 350,000 $900,000 Notes payable Total Current Assets Total Current Liabilities Net Fixed Assets: Long-Term Bonds Net plant and equipment (cost minus depreciation) $2,100,000 Total Debt Common Equity Common stock 800,000 700,000 $1,500,000 $3,000,000 Retained earnings Total Common Equity Total Liabilities and Equity Total Assets $3,000,000 The firm is currently in the process of forecasting sales, asset requirements, and required funding for the coming year. In the year that just ended, Cold Duck Manufacturing Inc. generated $500,000 net income on sales of $13,000,000. The firm expects sales to increase by 16% this coming year and also expects to maintain its long-run dividend payout ratio of 40%.

Explanation / Answer

a. If Cold Duck's assets are fully utilized, the assets will increase by 16%. New assets = 3,000,000*1.16 = 3,480.000

So Increase in total assets = 3,480,000 - 3,000,000 = 480,000 (Option C)

The spontaneous liabilties are accounts payable and accrued liabilties which are 250000 + 150000 = 400,000

So increase = 400,000* 0.16 = 64,000(Option B)

The Net income this year will be 500,000 *1.16 = 580,000. The divinds will be 580,000 *0.4 = 232,000

The amount that will go to retained earnings = 580,000 - 232,000 = $348,000

The assets = 3,480,0000

Liabilties + Equity = 464,000 + 100,000 + 1,000,000 +1,500,000 + 348,000 = 3,412,000

AFN = 3,480,000 - 3,412,000 =$ 68,000

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