Question

​(Financial

forecasting—percent

of

sales​)

Next​ year's sales for Cumberland Mfg. are expected to be

​$21.60

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

​$0.22

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?

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

​

million  ​(Round to two decimal​ places.)

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

​

million  ​(Round to two decimal​ places.)

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?

​

million  ​(Round to two decimal​ places.)

Answer 1

a.
Sales for coming year	$21,600,000
Profit after taxes	$1,080,000	21600000*5%
Dividend paid	$220,000
Retained balance	$860,000
Calculate total financing required
Current assets	$7,200,000	(6000000/18000000)*21600000
Fixed assets	$9,200,000	(9000000+200000)
Total assets	$16,400,000
Thus, total financing requirement or total assets for coming year is $16.40 million
Calculate discretionary financing needs as shown below:
Common equity	$11,500,000
Short term payable and trade credit	$1,800,000	(1.50/18)*21.6
Retained after tax earnings	$860,000
Long term debt	$2,000,000
Total financing available	$16,160,000
Discretionary financing	16400000-16160000
Discretionary financing	$240,000
Thus, discretionary financing needed is $0.24 million
Calculate maximum level of sales required where DFN is 0
DFN	(6/18sales + 9.20 million) - (11.5 million + 1.5/18 sales + 0.05*Sales - 220,000 + 2,000,000)
0	(6/18sales + 9.20 million) - (13.28 million + 1.5/18 sales + 0.05*Sales)
0	(6/18sales + 9.20 million) - 13.28 million - 1.5/18 sales - 0.05*Sales
0	(4.5/18*Sales - 0.05 Sales) - 4.08 million
4.08 million	0.25Sales - 0.05 sales
4.08 million	0.20Sales
Sales	4.08 million/0.20
Sales	$20.40	million
Thus, maximum sales allowed is $20.40 million