Carter Corporation\'s sales are expected to increase from $5 million in 2012 to
ID: 2736397 • Letter: C
Question
Carter Corporation's sales are expected to increase from $5 million in 2012 to $6 million in 2015, or by 20%. Its assets totaled $2 million at the end of 2014. Carter is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2014, 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 35%. Use the AFN equation to forecast the additional funds Carter will need 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.
Explanation / Answer
1.Calculation of additional funds needed using AFN Equation method :
AFN = Projected Increase in Assets - Spontaneous increase in assets - any increase in retained earnings
Given that increment in Sales is 20 % and assets must grow in proportion to projected sales.
Assets in 2014 = $20,00,000
Increment in assets = $400,000 (2000000*20%)
Profit margin = 5%
Sales projected = $60,00,000
profit in dollars= $300000
Retention ratio = 35%
Increase in retained earnings= $105000 (300000*35%)
liabilities ,2014= $10,00,000
Spontaneous increment would be applicable only to the liabilities other than long term liabilities.There was Notes payable $500000 which is a long term liability that should be excluded from the Spontaneous increment portion.
Spontaneous increment = $ 100,000 ( (1000000 - 500000) *20%) (there is no long term debt)
Additional funds required = $400000 - $100000 - $105000
= $195000
Since it was showing positive balance,company have to think about the projections once again
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