Finance: Planning and Forecasting
PROBLEMS
Carter Corporation’s sales are expected to increase from $5 million in 2006 to
$6 million in 2007 or by 20 percent. Its assets totaled $3 million at the end of
2006. Carter is at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2006, current liabilities were $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accruals. The after-tax profit margin is forecasted to be 5 percent, and the forecasted payout ratio is 70 percent. Use this information to answer Problems 9-1, 9-2, and 9-3.
9-1 Use the AFN formula to forecast Carter’s additional funds needed for the
AFN Formula coming year.
9-2 What would be the additional funds needed if the company’s year-end 2006 assets
AFN Formula had been $4 million? Assume that all other numbers are the same. Why is this AFN different from the one you found in Problem 9-1? Is the company’s “capital intensity” the same or different?
9-3 Return to the assumption that the company had $3 million in assets at the end of
AFN Formula
2006, but now assume that the company pays no dividends. Under these assump- tions, what would be the additional funds needed for the coming year? Why is this AFN different from the one you found in Problem 9-1?
9-1 AFN = (A*/S0)∆S - (L*/S0)∆S - MS1(1 - d) = $1,000,000 - $1,000,000 - 0.05($6,000,000)(1 - 0.7) = (0.6)($1,000,000) - (0.1)($1,000,000) - ($300,000)(0.3) = $600,000 - $100,000 - $90,000 = $410,000.
9-2 AFN = $1,000,000 – (0.1)($1,000,000) – ($300,000)(0.3) = (0.8)($1,000,000) - $100,000 - $90,000 = $800,000 - $190,000 = $610,000.
The capital intensity ratio is measured as A*/S0. This firm’s capital intensity ratio is higher than that of the firm in Problem 14-1; therefore, this firm is more capital intensive--it would require a large increase in total assets to
Carter Corporation’s sales are expected to increase from $5 million in 2006 to
$6 million in 2007 or by 20 percent. Its assets totaled $3 million at the end of
2006. Carter is at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2006, current liabilities were $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accruals. The after-tax profit margin is forecasted to be 5 percent, and the forecasted payout ratio is 70 percent. Use this information to answer Problems 9-1, 9-2, and 9-3.
9-1 Use the AFN formula to forecast Carter’s additional funds needed for the
AFN Formula coming year.
9-2 What would be the additional funds needed if the company’s year-end 2006 assets
AFN Formula had been $4 million? Assume that all other numbers are the same. Why is this AFN different from the one you found in Problem 9-1? Is the company’s “capital intensity” the same or different?
9-3 Return to the assumption that the company had $3 million in assets at the end of
AFN Formula
2006, but now assume that the company pays no dividends. Under these assump- tions, what would be the additional funds needed for the coming year? Why is this AFN different from the one you found in Problem 9-1?
9-1 AFN = (A*/S0)∆S - (L*/S0)∆S - MS1(1 - d) = $1,000,000 - $1,000,000 - 0.05($6,000,000)(1 - 0.7) = (0.6)($1,000,000) - (0.1)($1,000,000) - ($300,000)(0.3) = $600,000 - $100,000 - $90,000 = $410,000.
9-2 AFN = $1,000,000 – (0.1)($1,000,000) – ($300,000)(0.3) = (0.8)($1,000,000) - $100,000 - $90,000 = $800,000 - $190,000 = $610,000.
The capital intensity ratio is measured as A*/S0. This firm’s capital intensity ratio is higher than that of the firm in Problem 14-1; therefore, this firm is more capital intensive--it would require a large increase in total assets to