for problem 16-1 I got $346,000. I need help with problem 16-2. AFN EQUATION Car
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for problem 16-1 I got $346,000. I need help with problem 16-2.
AFN EQUATION Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $3 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 3%, and the forecasted retention ratio is 30%. Use the AFN equation to forecast the additional funds Carlsbad will need for the coming year.Explanation / Answer
The formula to calculate the AFN i.e.Additional Funds Needed is as under AFN = Increase in assets - Increase in short term liabilites - Increase in retained earnings Increase in assets = 2016 assets x Sales growth rate = $4 million x 20% = $0.80 million Increase in short term liabilities = [2016 accounts payable + 2016 accrued liabilities] x sales growth rate Increase in short term liabilities = [$250000 + $250000] x 20% = $100000 i.e. $0.10 million Increase in retained earnings = 2017 sales x Profit margin x retention ratio Increase in retained earnings = $6 million x 3% x 30% = $0.054 millions AFN = $0.80 million - $0.10 million - $0.054 million = $0.646 million i.e.$6,46,000 AFN is different from what you found in problem 16.1 is due to following reasons, As assets level grow in proportion with the sales growth % , the higher the 2016 asset level the requirement of additional assets will be more.To compensate this higher asset requirement more additional funds are needed. The company's capital intensity is different in both situation.Capital intensive refers to industries that require large amounts of capital investment, and therefore have a high percentage of fixed assets.Capital intensity ratio of a company is a measure of the amount of capital needed per dollar of revenue. It is calculated by dividing total assets of a company by its sales. Capital intensity in Problem 16-1 = Total assets / Total sales = $3 million / $5 million = $0.60 per dollar of revenue Capital intensity in Problem 16-2 = Total assets / Total sales = $4 million / $5 million = $0.80 per dollar of revenue
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