Question

(Financial forecastinglong dash—percent of sales​) Next​ year's sales for Cumberland Mfg. are expected to be ​$20.70 million. Current sales are ​$18 ​million, based on current assets of ​$6.00 million and fixed assets of ​$9.00 million. The​ firm's net profit margin is 5 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), ​$2 million in​ long-term debt​ (due in 10​ years), and common equity​ (including ​$3 million in retained​ earnings) totaling ​$11.50 million. Cumberland plans to pay ​$0.21 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