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30 May, 21:33

Carlsbad Corporation's sales are expected to increase from $5 million in 2018 to $6 million in 2019, or by 20%. Its assets totaled $3 million at the end of 2018. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2018, 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 3%, and the forecasted retention ratio is 30%. Use the AFN equation to forecast the additional funds Carlsbad will need for the coming year.

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  1. 30 May, 21:45
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    Additional Funds Needed: $ 346,000

    Explanation:

    To forecast the additional funds needed it's necessary to use the following equation:

    AFN = A0 + S1/S0 - L0 x S1/S0 - S1 x PM x b

    Where:

    A0 = Current Level of Assets

    S1/S0 = Percentage Increase in sales

    L0 = Current Level of Liabilities

    S1 = New Level of Sales

    PM = Profit Margin

    b = Retention rate = 1 - payout rate

    Final Value

    AFN = A0 (3,000,000) + S1/S0 (0,20) - L0 (1,000,000)

    x S1/S0 (0,20) - S1 (6,000,000) x PM (0,03) x b (0,30) = $346,000
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