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In: Finance

​(Financial forecasting long dash—percent of sales​) Next​ year's sales for Cumberland Mfg. are expected to be...

​(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?

Solutions

Expert Solution

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 = $              -  

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