AFN equation Carter Corporation\'s sales are expected to increase from 5 million

Question

AFN equation Carter Corporation's sales are expected to increase from 5 million in 2005 to 6 million in 2006, or by 20 percent. Its assets totaled 3 million at the end of 2005. Carter is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2005, current liabilities are $1 million, consisting of 250,000 of accounts payable, 500,000 of notes payable, and 250,000 of accrued liabilities. The after-tax profit margin is forecasted to be 5 percent, and the forecasted retention ratio is 30 percent. Use the AFN equation to forecast Carter's additional funds needed for the coming year.

Explanation / Answer

Additional fund needed = Increase in assets - increase in liabilities - increase in retention

= ($ 3 million * 20 %) - ($ 1 million * 20 % ) - ($ 1 million * 5% * 30%)

= 0.6 - 0.2 - 0.015

=$ 0.385 MILLION would be needed for coming year.

(Note :- $ 1 million is difference of $ 6 million & $ 5 million )

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