Carter Corporation's sales are expected to increase from TZS.50 million in 2015 to

Question

TZS.60,000,000 in 2016. Its assets totaled TZS.30,000,000 at the end of 2015. Carter is operating at full capacity, so its assets must grow in proportion to projected sales. At the end of 2015, current liabilities were TZS.10,000,000 consisting of TZS.2,500,000 of accounts payable, TZS.5,000,000 of notes payable, and TZS.2,500,000 of accrued liabilities. The after-tax profit margin is forecasted to be 5%, and the forecasted earnings retention ratio is 30 percent.
Required:
a)
Calculate Carter's additional funds needed for the year 2016.
b)
Calculate the value of assets for the year 2016.
c)
If the additional funds are to be raised through notes payable, what would be the amount of notes payable at the end of year 2016?

Answer 1

Let's go through each part of the problem step by step:

### a) Calculate Carter's Additional Funds Needed (AFN) for the year 2016.

The Additional Funds Needed (AFN) formula is:
\[ \text{AFN} = (A^*/S_0) \Delta S - (L^*/S_0) \Delta S - \text{MS}_1\,(1 - d) \]

Where:
- \( A^* \) is the assets at the end of 2015
- \( S_0 \) is the sales at the end of 2015
- \( \Delta S \) is the change in sales
- \( L^* \) is the spontaneous liabilities at the end of 2015 (accounts payable + accrued liabilities)
- \( \text{M} \) is the after-tax profit margin
- \( S_1 \) is the sales at the end of 2016
- \( d \) is the retention ratio

Given data:
- \( S_0 = TZS.50,000,000 \)
- \( S_1 = TZS.60,000,000 \)
- \( A^* = TZS.30,000,000 \)
- \( \Delta S = S_1 - S_0 = TZS.60,000,000 - TZS.50,000,000 = TZS.10,000,000 \)
- \( L^* = TZS.2,500,000 (\text{accounts payable}) + TZS.2,500,000 (\text{accrued liabilities}) = TZS.5,000,000 \)
- \( M = 5\% = 0.05 \)
- \( d = 70\% = 0.70 \) (since the retention ratio is 30%, so the dividend payout ratio is 70%)

Using the AFN formula:
\[ \text{AFN} = (TZS.30,000,000 / TZS.50,000,000) \times TZS.10,000,000 - (TZS.5,000,000 / TZS.50,000,000) \times TZS.10,000,000 - (0.05 \times TZS.60,000,000 \times (1 - 0.70)) \]
\[ \text{AFN} = 0.6 \times TZS.10,000,000 - 0.1 \times TZS.10,000,000 - (0.05 \times TZS.60,000,000 \times 0.30) \]
\[ \text{AFN} = TZS.6,000,000 - TZS.1,000,000 - TZS.900,000 \]
\[ \text{AFN} = TZS.4,100,000 \]

Therefore, Carter's additional funds needed for the year 2016 are TZS 4,100,000.

### b) Calculate the value of assets for the year 2016.

Since the assets must grow in proportion to the sales increase, we calculate the new value of assets:
\[ \text{New Assets} = A^* \left( \frac{S_1}{S_0} \right) \]

Using the given data:
\[ \text{New Assets} = TZS.30,000,000 \left( \frac{TZS.60,000,000}{TZS.50,000,000} \right) \]
\[ \text{New Assets} = TZS.30,000,000 \times 1.2 \]
\[ \text{New Assets} = TZS.36,000,000 \]

Therefore, the value of the assets for the year 2016 will be TZS 36,000,000.

### c) If the additional funds are to be raised through notes payable, what would be the amount of notes payable at the end of the year 2016?

If all of the additional funds (\( \text{AFN} \)) are to be raised through notes payable, we will add the AFN to the existing notes payable.

Given:
- Current notes payable at the end of 2015 = TZS.5,000,000
- Additional funds needed (AFN) = TZS.4,100,000

Therefore:
\[ \text{Notes Payable (2016)} = \text{Notes Payable (2015)} + \text{AFN} \]
\[ \text{Notes Payable (2016)} = TZS.5,000,000 + TZS.4,100,000 \]
\[ \text{Notes Payable (2016)} = TZS.9,100,000 \]

Therefore, if the additional funds are raised through notes payable, the amount of notes payable at the end of 2016 would be TZS 9,100,000.