Carlsbad Corporation’s sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $5 million at the end of 2016. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2016, 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 6%, and the forecasted retention ratio is 25%. Use the AFN equation to forecast Carlsbad’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.
Now assume the company’s assets totaled $3 million at the end of 2016. Is the company’s “capital intensity” the same or different comparing to initial situation?
b. the same
a). Additional funds needed (AFN) = increase in assets – increase in liabilities – increase in retained earnings.
increase in assets = 5 Million * 20 % = $ 1 Million i.e., $ 1000000.
increase in liabilities = (6000000 – 5000000) * 500000 / 5000000
= 1000000 * 500000 / 5000000
= 1000000 * 0.1
= $ 100000
increase in retained earnings = 6000000 * 6 % * 25 %
= $ 90000
Additional funds needed (AFN) = 1000000 – 100000 – 90000 = $ 810000.
Conclusion:- Additional funds needed = $ 810000.
b). Answer:- Capital intensity of company is different as compared to the initial situation.
Explanation:- Capital intensity of company is calculated by dividing total assets of company by its sales.
i) Capital intensity of company when total assets amounted to $ 5 Million initially:-
= 5000000 / 5000000
ii) Capital intensity of company when total assets amounted to $ 3 Million now :-
= 3000000 / 5000000
Accordingly, capital intensity of company is different when total assets of company amounted to $ 3 million at the end of year 2016 as compared to initial situation when total assets of company were $ 5 million.