Problem:
Caters Corporation’s sales are expected to increase from $5 million in 2005 to $6million in 2006, or by 20percent. Its assets totaled $3million 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, $5000,000 of notes payable, and $250,000 of accruals. The after tax profit margin is forecasted to be 5 percent, and the forecasted payout ration is 70 percent.
Use the AFN formula to forecast Carter’s additional funds needed for the coming year.
Additional = Required Spontaneous Increase in
Funds = Increase - increase in - retained
Needed = in assets Liabilities earnings
AFN = (A*/So) ΔS - (L*/So) ΔS - MS1 (RR)