Carter Corporation\'s sales are expected to increase from $5 million in 2010 to

Question

Carter Corporation's sales are expected to increase from $5 million in 2010 to $6 million in 2011, or by 20%. its assets totaled $3 million at the end of 2010. Carter is at full capacity, so its assets must grow in proportion the projected sales. At the end of 2010, 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%, and the forecasted retention ratio is 30%. Use the AFN equation to forecast the additional funds Carter will need for the coming year.

Explanation / Answer

AFN = Projected increase in assets – increase in liabilities – increase in retained earnings Projected increase in assets = Present assets * % Increase in sales = 3 * 0.2 = $0.6 million Increase in liabilities = Increase in current liabilities = Present current liabilities * % increase in sales = 1 * 0.2 = $0.2 million Increase in retained earnings = Increase in sales * Forecasted profit margin * Forecasted retention ratio = (6-5) * 0.05 * 0.3 = $0.015 million Additional funds = 0.6 - 0.2 - 0.015 = $0.385 million = $385,000

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