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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 AFN Equation, Excess Capacity, and Projected Financial Statements 1. 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 7%, and the forecasted retention ratio is 40%. Use the AFN equation to forecast the additional funds Carter will need for the coming year. Write out your answer compl etely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent. $ 332,000 AFN = (A*/S 0 )  S – (L*/S 0 )  S – MS 1 (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 - 2 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 $5 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. The after - tax profit margin is forecasted to be 6%, and the forecasted retention ratio is 40%. Use the AFN equation to forecast Carter'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. $ 756,000 AFN = ) 4 0,000)(0. 0 0 6 ($ 06 . 0 00,000) (0.1)($1,0 $1,000,000 $5,000,000 ,000,000 5 $ − −       = ( 1 )($1,000,000) – $100,000 – $ 14 4 , 00 0 = $ 1 00 0 ,000 – $ 244 ,000 = $ 756 ,000. Now assume the company's assets totaled $3 million at the end of 2012. Is the company's "capital intensity" the same or different comparing to initial situation? _________________

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    AFN = ) 4 ,000)(0. 0 00 6 ($ 06 . 0 00,000) (0.1)($1,0 $1,000,000 $5,000,000 ,000,000 3 $ − −       = (0.6)$1,000,000 – $100,000 – ($360,000)(0.4) = $600,000 - $100,000 - $144,000 = $356,000 The capital intensity ratio is measured as A*/S 0 . This firm’s capital intensity ratio is equal to initial situation ( Problem 1 also have Capital intensity of 0.6 ). 3. Problem 17 - 3 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 $4 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. The after - tax profit margin 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? Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent. $ ________ AFN =       $5,000,000 ,000,000 4 $ $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) = $80 0 , 000 – $ 100 , 000 – $420,000 = $280,000 b. 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, which would reduce the amount of additional funds needed. II. Under this scenario the company would have a higher level of retained earnings, which would 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, which would increase the amount of additional funds needed. V. Under this scenario the company would have a lower level of retained earnings, which would decrease the amount of additional funds needed. _________________

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