Please answer the question fully. AFN equation Carter Corporation\'s sales are e
ID: 2714222 • Letter: P
Question
Please answer the question fully.
AFN equation
Carter Corporation's sales are expected to increase from $5 million in 2012 to $6 million in 2013, or by 20%. Its assets totaled $4 million at the end of 2012. Carter is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2012, 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 6%.
a. Assume that the company pays no dividends.
Under these assumptions, what would be the additional funds needed 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.
$____________________
b. Why is this AFN different from the one when the company pays dividends?
I. Under this scenario the company would have a lower level of retained earnings, which would increase the amount of additional funds needed.
II. Under this scenario the company would have a lower level of retained earnings, which would decrease the amount of additional funds needed.
III. Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of additional funds needed.
IV. Under this scenario the company would have a higher level of retained earnings, which would reduce the amount of assets needed.
V. Under this scenario the company would have a higher level of spontaneous liabilities, which would reduce the amount of additional funds needed.
I, II,III, IV, OR V
Explanation / Answer
AFN = (A/S0)S–(L/S0)S–MS1(RR)
A- Assets tied directly to sales
L-spontaneous liabilities that are affected by sales
S0=the previous year's sales
S1=total projected sales for next year
S=the change in sales between S0 and S1
MS1=projected net income
RR=the retention ratio from net income
AFN = ($4,000,0000/$5,000,000)×$1,000,000–(($500,000+$250,000)/$5,000,000)×$1,000,000–$6,000,000×6%
= $290,000
Correct option is (I)
Since, company pays dividends its cash availability will decrease to support additional funds required. Hence, these will be financed from outside.