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    Additional funds needed

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    Carter Corporation sales are expected to increase from $5 million in 2005 to $6 million in 2006, or by 20%. Its assets totaled $3 million at the end of 2005. Carter is at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2005 current liabilities were $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accruals. The after-tax profit margin is forecasted to be 5%, and the forecasted payout ration is 70%.

    Use the AFN formula to forecast Carter's additional funds needed for the coming year.

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    Solution Preview

    The AFN formula is
    AFN = (A*/S0)(deltaS)- (L*/ S0)(deltaS)- MS1(RR)
    where A* is assets tied directly to sales; S0 is sales in past year; deltaS is change in sales project from last year to next; L* is dollar liabilities that increase spontaneously; M is ...

    Solution Summary

    The solution explains how to calculate the additional funds needed.