Question

(Financial

forecastinglong dash—percent

of

sales​)

Next​ year's sales for Cumberland Mfg. are expected to be ​$22.00 million. Current sales are ​$18

​million, based on current assets of $5.00 million and fixed assets of ​$5.00million. 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​ $150,000. Currently, Cumberland has $2.00 million in accounts payable​ (which vary directly with​ sales), ​$1 million in​ long-term debt​ (due in 10​ years), and common equity​ (including​ $4 million in retained​ earnings) totaling ​$7.00 million. Cumberland plans to pay $0.75 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​ $150,000 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?

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

​$nothing

million  ​(Round to two decimal​ places.)

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

​$nothing

million  ​(Round to two decimal​ places.)

c. Based on your​ projections, and assuming that the​ $150,000 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?

​$nothing

million  ​(Round to two decimal​ places.)

Answer 1

a]	Total assets for the coming year = Projected current assets+Projected fixed assets = (5/18)*22+5.15 =	$           11.26	millions
b]	Discretionary financing needs = Increase in total assets-Increase in spontaneous liabiities-Retained earnings for the next year
	= (11.26-10.00)-(2/18)*4-22*5%-0.75 =	$             0.47	millions
c]	To find the growth rate, the above equation should
	be set to 0.
	0 = 5*g+0.15-2*g-[18*(1+g)*5%-0.75]
	Solving for g
	0 = 5g+0.15-2g-[0.9+0.9g-0.75]
	0 = 5g+0.15-2g-0.9-0.9g+0.75
	2.1g = 0
	g = 0
	Maximum growth rate = 0%
	CHECK:
	With 0% growth rate no increase in curent assets would
	be there; but fixed assets would increase by $0.15 m.
	There would be no increase in spontaneous liabilities
	also.
	Hence, $0.15 m would equal the increase in retained
	earnings which is 18*5%-0.75 = $0.15 m
	It is assumed that dividends of $0.15 m will be paid anyway.