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

Question

AFN equation

Carter Corporation's sales are expected to increase from $5 million in 2012 to $6 million in 2013, or by 20%. Its assets totaled $6 million at the end of 2012. Carter is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2012, 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 4%, and the forecasted retention ratio is 30%. Use the AFN equation to forecast Carter's additional funds needed 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 cent.

$  

Now assume the company's assets totaled $4 million at the end of 2012. Is the company's "capital intensity" the same or different comparing to initial situation? -Select-differentthe same  Item 2

Explanation / Answer

AFN = increase in assets - increase in spontaneous current liabilities - retained earnings in 2013
= 20%*6,000,000 - (250,000+250,000)*20% - 4%*6,000,000*30% = 1,028,000
Key things to note are: spontaneous current liabilities do not include notes payable. Retained earnings in 2013 = net income in 2013 * retention ratio.
If company's assets totaled $4mn at end of 2012 instead of $6mn, then the company's capital intensity is different comparing to initial situation.
Hope this helped ! Let me know in case of any queries.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.