Question

(Financial forecastinglong dashpercent of sales​) Next​ year's sales for Cumberland Mfg. are expected to be ​$14.95 million. Current sales are ​$13 ​million, based on current assets of ​$4.33 million and fixed assets of ​$6.50 million. The​ firm's net profit margin is 3 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 ​$2 million in retained​ earnings) totaling ​$7.33 million. Cumberland plans to pay ​$0.15 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

Part(a)

Data given in question
Particulars	Amount in million
Next year sales	$ 14.95
Current year sales	$ 13
Current Assets	$ 4.33
Fixed Assets	$ 6.50
Net profit margin	3% after tax
Current account payable	$ 1.50
Long term debt	$ 2
Common equity including retained earning	$ 7.33
Dividend payable next year	$ 0.15

Current year % calculation
Current Asset % on sales (4.33 /13)	33.31%
Accounts payable % on sales (1.5 /13)	11.54%
Calculation of Total asset in next year
Next year sales	$ 14.95
% of curent asset on sales	33.31%
Current assets next year is (14.95 x 33.31%)	4.980
last year fixed asset	$ 6.50
Add:addition this year $ 200000	$ 6.7
TOTAL ASSET IS (4.98+6.7)	$ 11.679

Part (b)

Calculation of firms' discretionary financial needs
Accounts payable next year (11.54% on sales next year	$1.725
Long term debt	$ 2
Common equity (7.33 -Retained earning of 2)	$ 5.33
Retained earnings
Last year                                                 $ 2
Add:Current year (14.95 x 3%)           $ 0.4485
Total                                                       $ 2.4485
Less:Dividends paid                             $0.15
Retained earning balance                  $ 2.2985	$2.2985
TOTAL LIABILITIES +EQUITY	$11.3535

Discretionary financial needs is =Total asset -Total liabilities&equity
(11.679 - 11.3535)	$0.3255

Part (c)

Calculation of largest increase in sales
Let current growth rate be = "g"
Current asset x g + $0.2
Accounts payable x g + (sales(1+g) xprofit margin)-dividend payout
4.33 g + 0.2 =1.5 g + (13 x(1+g) x3% -0.15
4.33g+0.2 = 1.5g+0.24 +0.39g
therefore "g" =(0.24 - 0.2)/(4.33g-1.5g-0.39g)
g =0.04/2.44
g = 1.64%
Hence largest increase in sales = 13 x1.64% = 0.2132