# Question: Carlsbad Corporation’s sales are expected to

## Description

Question:
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?

a. different

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

= 1.

ii) Capital intensity of company when total assets amounted to \$ 3 Million now :-

= 3000000 / 5000000

= 0.60

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.

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