Question

Carlsbad Corporation's sales are expected to increase from $5 million in 2019 to $6 million in 2020, or by 20%. Its assets totaled $3 million at the end of 2019. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2019, 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 4%. Assume that the company pays no dividends. Use the AFN equation to forecast the additional funds Carlsbad will need 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 dollar. $

Answer 1

Answer:

Answer is explained and solved in the explanation section below.

Explanation:

Data Given:

First we need to clearly extract the data from the question.

Sales of the year = 5000000

Increase in Sales (%) = 20%

Profit Margin = 4%

Retention Ratio = 100%

Dividend Payout = 0

1. Increase in Assets necessary  to support increase in Sales = Increase in Sales x total Assets = 20% x 3000000 = 600000

2. Increase in Liabilities necessary to support increase in Sales = Increase in Sales x Total Liabilities Accounts payable + Accrued Liabilities + other payables = 20% x 500000 = 100000

3. Net Income = 5000000 x (1 + 0.20) x 4% = 240,000

So Addition of Retained Earnings = 100% = 240,000

4. AFN = Increase in Assets - Increase in Liabilities - Increase in Retained Earnings = 600000 - 100000 - 240000 = 260000

Under this scenario, the company would have higher level of retained earnings which would reduce the amount of additional funds needed.