Financial Forecasting And Pro Forma Analysis: Applications Of The AFN Equation, Excess Capacity, And Projected Financial Statements

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Financial Forecasting and Pro Forma Analysis: Applications of the AFNEquation, Excess Capacity, and Projected Financial Statements1.AFN equationCarter Corporation's sales are expected to increase from $5 million in 2012 to $6 million in 2013, orby 20%.Its assets totaled $3 million at the end of 2012. Carter is at full capacity, so its assets must grow inproportion to projected sales. At the end of 2012, current liabilities are $1 million, consisting of $250,000 ofaccounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin isforecasted to be 7%, and the forecasted retention ratio is 40%. Use the AFN equation to forecast theadditional funds Carter will need for the coming year. Write out your answer completely. For example, 5million should be entered as 5,000,000. Round your answer to the nearest cent.$332,000AFN= (A*/S0)S–(L*/S0)S–MS1(RR)=$5,000,000$3,000,000$1,000,000–$5,000,000$500,000$1,000,000–0.07($6,000,000)(0.4)= (0.6)($1,000,000)–(0.1)($1,000,000)–($420,000)(0.4)= $600,000–$100,000–$168,000= $332,000.2.Problem 17-2AFN equationCarter Corporation's sales are expected to increase from $5 million in 2012 to $6 million in 2013, or by20%. Its assets totaled $5 million at the end of 2012. Carter is at full capacity, so its assets must grow inproportion to projected sales. At the end of 2012, current liabilities are $1 million, consisting of $250,000 ofaccounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. The after-tax profitmargin is forecasted to be 6%, and the forecasted retention ratio is 40%. Use theAFN equation to forecastCarter's additional funds needed for the coming year. Write out your answer completely. For example, 5million should be entered as 5,000,000. Round your answer to the nearest cent.$756,000AFN=)40,000)(0.006($06.000,000)(0.1)($1,0$1,000,000$5,000,000,000,0005$−−= (1)($1,000,000)–$100,000–$144,000=$1000,000–$244,000= $756,000.Now assume the company's assets totaled $3 million at the end of 2012. Is the company's "capitalintensity" the same or different comparing to initial situation?_________________

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AFN =)4,000)(0.0006($06.000,000)(0.1)($1,0$1,000,000$5,000,000,000,0003$−−= (0.6)$1,000,000–$100,000–($360,000)(0.4)= $600,000-$100,000-$144,000=$356,000The capital intensity ratio is measured as A*/S0. This firm’s capital intensity ratio isequalto initial situation(Problem 1 also have Capital intensityof 0.6).3.Problem 17-3AFN equationCarter 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 inproportion to projected sales. At the end of 2012, current liabilities are $1 million, consisting of $250,000 ofaccounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. The after-tax profitmargin is forecasted to be 7%.a.Assume that the company pays no dividends.Under these assumptions, what would be the additional funds needed for the coming year? Writeout your answer completely. For example, 5 million should be entered as 5,000,000. Round youranswer to the nearest cent.$________AFN=$5,000,000,000,0004$$1,000,000–(0.1)($1,000,000)–0.07($6,000,000)(1)= (0.8)$1,000,000–(0.1)($1,000,000)–0.07($6,000,000)(1)=$800,000–$100,000–$420,000= $280,000b.Why is this AFN different from the one when the company pays dividends?I.Under this scenario the company would have a higher level of retained earnings, whichwould reduce the amount of additional funds needed.II.Under this scenario the company would have a higher level of retained earnings, whichwould reduce the amount of assets needed.III.Under this scenario the company would have a higher level of spontaneous liabilities,which would reduce the amount of additional funds needed.IV.Under this scenario the company would have a lower level of retained earnings, whichwould increase the amount of additional funds needed.V.Under this scenario the company would have a lower level of retained earnings, whichwould decrease the amount of additional funds needed._________________

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