Question

​(Financial forecasting long dash—percent of sales​) Next​ year's sales for Cumberland Mfg. are expected to be ​$19.20 million. Current sales are ​$16 ​million, based on current assets of ​$5.33 million and fixed assets of ​$8.00 million. The​ firm's net profit margin is 44 percent after taxes. Cumberland estimates that its current assets will rise in direct proportion to the increase in​ sales, but that its fixed assets will increase by only​ $200,000. Currently, Cumberland has $1.50 million in accounts payable​ (which vary directly with​ sales), $22 million in​ long-term debt​ (due in 10​ years), and common equity​ (including $33 million in retained​ earnings) totaling $9.83 million. Cumberland plans to pay $0.19 million in common stock dividends next year.

a. What are​ Cumberland's total financing needs​ (that is, total​ assets) for the coming​ year?

b. Given the​ firm's projections and dividend payment​ plans, what are its discretionary financing​ needs?

c. Based on your​ projections, and assuming that the​ $200,000 expansion in fixed assets will​ occur, what is the largest increase in sales the firm can support without having to resort to the use of discretionary sources of​ financing?

Answer 1

a]	PROJECTIONS OF ASSETS:	[$ in millions]
	Fixed assets = 8+0.2 =	$       8.200
	Current assets = 5.33*120% =	$       6.396
	Total financing needs	$    14.596
b]	PROJECTIONS OF LIABILITIES & EQUITY:
	Accounts payable = 1.5*120% =	$       1.800
	LT debt	$       2.000
	Common equity = 9.83+19.20*4%-0.19 =	$    10.408
	Total liabilities and equity before AFN	$    14.208
	DFN = 14.596-14.208 =	$       0.388
c]	DFN = 0.2+5.33*g-1.5*g-16*(1+g)*0.04-0.19 = 0
	Solving for g
	0.2+5.33*g-1.5*g-0.64-0.64*g+0.19 = 0
	0.63 = 4.69*g
	g = 0.25/3.19 =	7.84%
	CHECK:
	PROJECTIONS OF ASSETS:	[$ in millions]
	Fixed assets = 8+0.2 =	$       8.200
	Current assets = 5.33*(1+0.25/3.19) =	$       5.748
	Total financing needs	$    13.948
	PROJECTIONS OF LIABILITIES & EQUITY:
	Accounts payable = 1.5*(1+0.25/3.19) =	$       1.618
	LT debt	$       2.000
	Common equity = 9.83+16*(1+0.25/3.19)*4%-0.19 =	$    10.330
	Total liabilities and equity before AFN	$    13.948
	DFN =	$              -