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Additional Funds Needed

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Carter Corporation' sales are expected to increase from $5 million in 2004 to $6 million in 2005, or by 20%. Its assets totaled $3 million at the end of 2004. Carter is at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2004, 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 this information to answer the following:

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

b. What would be the additional funds needed if the company's year-end 2004 assets had been $4 million? Assume that all other numbers are the same. Why is this AFN different from the one you found in problem A?

c. Return to the assumption that the company had $3 million in assets at the end of 2004, but now assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Why is this AFN different from the one you found in problem A?

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Solution Summary

This solution looks at the additional funds needed for a company that has increasing sales. Different asset and dividends scenarios are evaluated.

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Additional funds needed = Increase in assets - Increase in liabilities - Increase in retained earnings.

Part A
The assets will have to increase from $3,000,000 to 1.2 * $3,000,000 = $3,600,000. This is an increase of $600,000.
The after-tax profits will be 5% of $6,000,000 = $300,000.
With a 70% payout ...

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