Hello, below are the two questions pertaining to AFN that I botched. I am not sure what an appropriate payment is, this is my first time using a tutor like this. Suggestion??? I need the answer sometime by the end of the weekend, not a super hurry. Thanks, Leana

17.1 AFN EQUATIONCarter 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 5%, and the forecasted retention ratio is 30%. Use the AFN equation to forecast the additional funds Carter will need for the coming year.

Answer

a)AFN=$310,000

Increase in assets= (3,000,000/5,000,000) x 1,000,000 = 600,000

Spontaneous increase in payables/accruals= (1,000,000/5,000,000) x 1,000,000 = 200,000

Funds obtained by retained earnings = (.05) (6,000,000) (.30) = 90,000

600,000 - 200,000 - 90,000 = 310,000

AFN is incorrect. Need to review the formula. Spontaneous increase in liabilities as well increase in retained earnings are incorrect. See section 17-3 for AFN examples.

Question Two

Refer to problem 17-1. The company's executive team is very concerned about funding growth with new debt, given the existing liabilities. What strategies might the company consider to reduce its AFN?(1-2 paragraphs)

Answer

a)In order to reduce the AFN, the company can consider 1) reducing the projected increase in assets, 2) increasing retained earnings, 3) improving the profit margin, or 4) effecting change in more than one factor of the calculation.

The above calculation for the $310 AFN is based on 20% growth. Lowering the growth lowers the AFN. Based on calculations, if the company held to 10% growth with the other figures remaining constant, the AFN would be $117,500. At 5% growth, the company would approach a nearly zero AFN or sustainable growth with an AFN of only $21,250. At 3.5% growth, the company would approach a negative AFN.

(.6) (500,000) - (.2) (1,000,000) - (.05) (500,000) - (.05) (5,500,000) (.30)

300 ,000 - 100,000 - 82,500 = 117,000

(.6) (250,000) - (.2) (1,000,000) - (.05) (250,000) - (.05) (5,250,000) (.30)

150,000 -50,000 - 78,750 = 21,250

Another strategy to reduce the AFN is to increase retained earnings by increasing the dividend payout. While the problem does not describe what the dividend payouts are, assuming that the dividends are increased such that retained earnings represent 40% (120,000) rather than 30% (90,000) and all other factors remain the same, the AFN would be $280,000.

Funds obtained by retained earnings = (.05) (6,000,000) (.40) = 120,000

(.6) (1,000,000) - (.2) (1,000,000) - (.05) (6,000,000) (.4)

600,000 - 200,000 - 120,000 = 280,000

If it is possible to renegotiate contracts with vendors to lower costs, then it is possible to increase the profit margin and therefore increase retained earnings. If the profit margin could be increased to .06 from the current .05 for example, with all other factors remaining equal, the retained earnings would increase from $90,000 to $108,000 and the APN would be $292,000 instead of $310,000.

Funds obtained by retained earnings = (.06) (6,000,000) (.30) = 108,000

(.6) (1,000,000) - (.2) (1,000,000) - (.06) (6,000,000) (.3)

600,000 - 200,000 - 108,000 = 292,000

Lastly, the company could look at improving two factors, such as limiting growth to 10% while improving the profit margin to 6%. In this scenario, the AFN would be reduced from $310,000 to $101,000.

(.6) (500,000) - (.2) (1,000,000) - (.05) (500,000) - (.06) (5,500,000) (.30)

300 ,000 - 100,000 - 99,000 = 101,000

Incorrect AFN computation affects the calculations shown in this part. Needs to be redone based on corrected LO 5.1