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Additional Funds Needed (AFN)

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Carter's corporation sales are expected to increase from 5 million in 05 to 6 million in 06 or by 20%. Its assets totaled 3 million at the end of 05. Carter is at full capacity so its assets must grow in proportion to projected sales. At the end of 05, 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 5% and the forecasted retention ratio is 30%. Use the AFN equation to forecast Carter's additional funds needed for the coming year.
On the other hand assuming the company paid no dividends, what would the new afn for the coming year. Why would this be different? from the first AFN?

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Solution Preview

L* is 500,000 which is accounts payable and accrued liabilities

Use the Additional Funds Needed formula to forecast Carter's additional funds needed for the coming year.

AFN = (A*/S0)(ΔS)- (L*/ S0)(ΔS)- MS1(RR)
where A* is assets tied directly to sales; S0 is sales in past year; ΔS is change in sales project from last year to next; L* is dollar liabilities that increase spontaneously; M is the profit margin per dollar of sales; S1 is ...

Solution Summary

The solution explains how to calculate the additional funds needed

$2.19