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 $3 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. Its profit margin is forecasted to be 5%, and the forecasted retention ratio is 30%. Use the AFN equation to forecast the additional funds Carter will need for the coming year.
a) Do problem 17-1 (solved)
AFN = (Required asset increase)-(Spontaneous liability increase)- (Increase retained earnings)
=(($3,000,000/$5,000,000) x1,000,000) - (($500,000/$5,000,000)x1,000,000-0.05($6,000,0000(0.3)
=(0.6)($1,000,000) - (0.1)($1,000,000) - ($300,000)(0.3)
=$600,000 - $100,000 - $90,000
=$410,000
b) With the liabilities above- what strategies can the company use to reduce afn?