Roses sales are expected to increase from $5 million in 2005 to $6 million in 20
ID: 2662146 • Letter: R
Question
Roses sales are expected to increase from $5 million in 2005 to $6 million in 206, or by 20 percent. Its assets totaled $3 million at the end of 2005. Roses is at full capacity, so its assets must grow in proprotion 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 accured 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 Roses's additional funds needed for the coming year.Explanation / Answer
AFN = (A*/S0)S - (L*/S0)S -MS1(RR)
= (3.6/5)*1 – (1/5)*1 – 0.3*0.30 =0.72-0.2-0.09=0.43M = $430k
Where:
A* = Assets tied directly to sales and will increase : $3M &will grow by 20% to $3.6M
L* = Spontaneous liabilities that will be affected by sales.(NOTE: Not all liabilities will be affected by sales such aslong-term debt) : $1M
S0 = Sales during the last year $5M
S1 = Total sales projected for next year (the newlevel of sales). $6M
S = The increase in sales between S0 andS1 : $1M
M = Profit margin, or the profit per $1 of sales : 5% i.e(5% of $6M= $300k)
MS1 = Projected Net Income : 5% of $6M= $300k
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