Carter Corporation\'s sales are expected to increase from $5 million in 2012 to

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 $4 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 3%, and the forecasted retention ratio is 30%. 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

Where,
Ao = current level of assets
S/So = percentage increase in sales i.e. change in sales divided by current sales
Lo = current level of liabilities
S1 = new level of sales
PM = profit margin
b = retention rate = 1 – payout rate

(3,000,000/5000000)*1000000 -(500000/5000000)*1000000 -0.03*(6000000)(1-0.7)

=$600,000 - $100,000 - $54,000

= 446000

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