Please answer the question fully. AFN equation Carter Corporation\'s sales are e

Question

Please answer the question fully.

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 $4 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 6%.

a. Assume that the company pays no dividends.
Under these assumptions, what would be the 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.
$____________________

b. Why is this AFN different from the one when the company pays dividends?

I. Under this scenario the company would have a lower level of retained earnings, which would increase the amount of additional funds needed.

II. Under this scenario the company would have a lower level of retained earnings, which would decrease the amount of additional funds needed.

III. Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of additional funds needed.

IV. Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of assets needed.

V. Under this scenario the company would have a higher level of spontaneous liabilities, which would reduce the amount of additional funds needed.

I, II,III, IV, OR V

Explanation / Answer

AFN = (A/S0)S–(L/S0)S–MS1(RR)

A- Assets tied directly to sales

L-spontaneous liabilities that are affected by sales

S0=the previous year's sales

S1=total projected sales for next year

S=the change in sales between S0 and S1

MS1=projected net income

RR=the retention ratio from net income

AFN = ($4,000,0000/$5,000,000)×$1,000,000–(($500,000+$250,000)/$5,000,000)×$1,000,000–$6,000,000×6%

= $290,000

Correct option is (I)

Since, company pays dividends its cash availability will decrease to support additional funds required. Hence, these will be financed from outside.

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