AFN EQUATION Carlsbad Corporations sales are expected to inc

AFN EQUATION Carlsbad Corporation\'s sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $5 million at the end of 2016. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2016, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 7%, and the forecasted retention ratio is 40%. Use the AFN equation to forecast Carlsbad\'s 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. $

Solution

AFN=
A0* percentage increase in sales(-)L0* percentage increase in sales(-)S1*PM*b
Where,

A o = current level of assets
Lo = current level of liabilities (10,00,000-250,000)
S1 = new level of sales
PM = profit margin
b = retention rate = 1 – pay out rate

AFN=5*.20(-).75*.20(-)6*.07*.40

=1-.15-.168

=.682 ($6,82,000)

So additional funds needed is $6,82,000