Question

Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $4 million at the end of 2016. Carlsbad 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 5%. 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. $

Answer 1

Answer:

Additonal Funds Needed

$ 300.000  

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 ($4,000,000) + S1/S0 (0,20) - L0 ($1,000,000)

x S1/S0 (0,20) - S1 ($ 6,000,000) x PM (0,05) x b (1,00) = $300,000

The additional funds needed is the amount of money that the company needs to fulfill the financial needs of the company.  

This equation gives a new capital structure that includes an optimum mix of debt, preferred and common stock.

The above equation indicate the excess increase in assets over the increase in liabilities and retained earnings as a consequence of the new level of sales.