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Financial forecasting-% of sales) Tulley Appliances Inc. projects next year's sales to be $19.6 million. Current...

Financial forecasting-% of sales) Tulley Appliances Inc. projects next year's sales to be $19.6 million. Current sales are $15.4 million, based on current assets of $5.1 million and fixed assets of $5.2 million. The firm's net profit margin is 4.9% after taxes. Tulley forecasts that its current assets will rise in direct proportion to the increase in sales, but that its fixed assets will increase by only $109,000. Currently, Tulley has $1.5 million in acct. payable (which vary directly with sales), $2.1 million in long-term debt (due in 10 years), and common equity (including $4.2 million in retained earnings) totaling $6.4 million. Tulley plans to pay $536,000 in common stock dividends next year.
a. What are Tulley's total financing needs (i.e., total assets) for the coming year?

Pro Forma Balance sheet Next Year % of Sales

b. Given the firm's projections and dividend payments plans, what are its discretionary financing needs?
c. Based on your projections, and assuming that the $109,000 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 financing?
Show the necessary steps and report the results of your analysis.

Expert Solution

a. Total Financing needs = Projected Assets for next year

Projected Assets for next year = Projected Current Assets + Projected Fixed Assets

Projected Current Assets in proportion to sales = (19.6* 5.1)/ 15.4 = $ 6.49 m

Projected Fixed Assets = $5.2m + $ 0.109 m = $5.309m

Projected Assets for next year = $ 6.49 m +$5.309m = $11.799 million

b. Discretionary Financing Needs = Projected Current Assets + Projected Fixed Assets - Present Long Term Debt - Present Owners Equity - [Projected Income - Projected Dividends] - Adhoc Financing through accounts payable

Projected Current Assets = $6.49 m [ as calculated above]

Projected Fixed Assets = $5.2m + $ 0.109 m = $5.309m

Present Long term Debt = $2.1 m

Present Owner's equity = $6.4 m

Projected Income = Net Profit Margin * Net Sales = 4.9 % * 19.6m

= 0.9604 million

Projected Dividends = $0.536 million

Adhoc Financing through accounts payable = (19.6*1.5)/ 15.4 = $1.909 million

Discretionary Financing Needs = $6.49 m + $5.309m - $2.1 m - $6.4 m - [ $0.9604m - $0.536 m] - $1.909m

= 0.966 million

c. Finding out the maximum sales for which DNF will be zero

DNF = (5.1m /15.4m - 0.049 - 1.5m/15.4m) * Sales - ( 5.309m - 2.1m - 6.4m +0.424m)

(0.331 -0.049 - 0.097) *Sales - ( 13.385) = 0

Sales = 14.95 million

jeff jeffy answered 2 years ago

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