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The Candy Company sales are forecasted to increase from \$1000 in 2005 to
\$2000 in 2006. Here is the December 31, 2005, balance sheet:

Cash \$100 Accounts payable \$50
Accounts receivable \$200 Notes payable \$150
Inventories \$200 Accruals \$50
Current assets \$500 Current liabilities \$250
Net fixed assets \$500 Long term debt \$400
Common stock \$100
Retained earnings \$250

Total assets \$1000 Total liabilities and equity \$1000

The company's fixed assets were used to only 50 percent of capacity during 2005, but its current assets were at their proper levels. All assets except fixed assets increase at the same rate as sales, and fixed assets would also increase at the same rate if the current excess capacity did not exist. The company after-tax profit margin is forecasted to be 5 percent, and its payout ratio will be 60 percent. What is the company's additional funds needed (AFN) for the coming year? Ignore financing feedback effects.

#### Solution Preview

The Candy Company sales are forecasted to increase from \$1000 in 2005 to
\$2000 in 2006. Here is the December 31, 2005, balance sheet:

Cash \$100 Accounts payable \$50
Accounts receivable \$200 Notes payable \$150
Inventories \$200 Accruals \$50
Current assets \$500 Current liabilities \$250
Net fixed assets \$500 Long term debt \$400
Common stock \$100
Retained earnings \$250

Total assets ...

#### Solution Summary

The solution explains how to calculate the AFN if there is unused capacity.

\$2.19