Question

​(Financial

forecasting—percent

of

sales​)

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

​$16.10

million. Current sales are

​$14

​million, based on current assets of

​$4.67

million and fixed assets of

​$7.00

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

​$3

million in retained​ earnings) totaling

​$8.17

million. Cumberland plans to pay

​$0.16

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

Solution:

Question 1: In the following way it is to be solved .

Step 1: To commute the current year figures and next year projected figure of current asset,fixed asset ,equity paid up etc.

Step 2 : For solving question i.e Discretionary financing need the d difference between total asset and Total Libilities is required to be ascertained.

Step 3: For solving question 3 we need to assume the growth as g and after that compute the rate of growth on current asset. This will be the maximum possible growth assuming fixed asset increased by 2 million.

Excel solution is as follows: