Carter Corporation's sales are expected to increase from $5 million in 2004 to $6 million in 2005, or by 20 percent. Its assets totaled $3 million at the end of 2004. Carter is at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2004, 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.
A Use the Additional Funds Needed formula to forecast Carter's additional funds needed for the coming year.
B. What would be the Additional funds needed if the company's year end 2004 assets had been $4 million? Assume that all others numbers are the same. Why is the Additional Funds Needed different from the one you found in problem A? Is the company's "capital intensity" the same or different?
C. Return to the assumption that the company had $3 million is assets at the end of 2004, but now assumes that the company pays no dividends. Under these assumptions, what would be the Additional Funds Needed for the coming year? Why is this Additional Funds Needed different from the one you found in Problem A?
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