Question

Carlsbad Corporation’s sales are expected to increase from $5 million in 2018 to $6 million in 2019, or by 20%. Its assets totaled $3 million at the end of 2018. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2018, 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 Carlsbad will need for the coming year.

Answer 1

Answer:

Additional Funds Needed: $ 346,000

Explanation:

To forecast the additional funds needed it's necessary to use the following equation:

AFN = A0 + S1/S0 - L0 x S1/S0 - S1 x PM x b

Where :

A0 = Current Level of Assets

S1/S0 = Percentage Increase in sales

L0 = Current Level of Liabilities

S1 = New Level of Sales

PM = Profit Margin

b= Retention rate = 1 - payout rate

Final Value

AFN = A0(3,000,000) + S1/S0(0,20) - L0(1,000,000)

x S1/S0(0,20) - S1(6,000,000) x PM (0,03) x b (0,30) = $346,000