Mr William, the new financial manager of Alpha Chemicals (AC), a California producer of specialized chemicals for use in fruit orchards, must prepare a formal financial forecast for 2019. Mr Willliam thinks the company was operating at full capacity in 2018, but he is not sure about this. The first step in his forecast was to assume that key ratios would remain unchanged and that it would be “business as usual” at AC. The 2018 financial statements are given below. Alpha Chemicals Balance sheet As on December 31, 2018 Cash 25,000 Accounts Payable 10,000 Accounts receivable 3,000 Notes Payable 3,000 Inventory 22,000 other accruals 5,000 Current assets 50,000 Current Liabilities 18,000 Long Term Debts 35,000 Net Plant and Equipment 69,000 Common Stocks 40,000 Retained Earnings 26,000 Total Assets 119,000 Total Liabilities and Equity 119,000 Alpha Chemicals Income Statement For the Years Ended December 31, 2018 Net sales 1,072,000 CGS 921,000 Gross Profit 151,000 Selling &General & Admin Expense 86,000 General & Admin Expense 32,000 Operating Profit 33,000 Interest Expense 5,000 Profit before taxes 28,000 Taxes (40%) 11,200 Net Income 16,800 Dividend 7,560 Required: Now assume that the company was operating at 75% capacity in 2018, What would be the external funding requirement if the sales is projected to increase by 25%?
Mr William, the new
Alpha Chemicals
Balance sheet
As on December 31, 2018
Cash 25,000 Accounts Payable 10,000
Inventory 22,000 other accruals 5,000
Current assets 50,000 Current Liabilities 18,000
Long Term Debts 35,000
Net Plant and Equipment 69,000 Common Stocks 40,000
Total Assets 119,000 Total Liabilities and Equity 119,000
Alpha Chemicals
Income Statement
For the Years Ended December 31, 2018
Net sales 1,072,000
CGS 921,000
Gross Profit 151,000
Selling &General & Admin Expense 86,000
General & Admin Expense 32,000
Operating Profit 33,000
Interest Expense 5,000
Profit before taxes 28,000
Taxes (40%) 11,200
Net Income 16,800
Dividend 7,560
Required:
- Now assume that the company was operating at 75% capacity in 2018, What would be the external funding requirement if the sales is projected to increase by 25%?
Suppose 2019 sales are projected to increase by 25% over 2018 sales. Use percent of sales method to forecast a balance sheet and income statement for December 31, 2019. The interest rate on all debt is 10%, Assume that all additional debt in the form of notes payable is added at the end of the year, which means that you should base the forecasted interest expense on the balance of debt at the beginning of the year. Assume that the
company was operating at full capacity in 2018, that it cannot sell off any of its
fixed assets, and that any required financing will be borrowed as notes payable. Determine the additional funds needed.
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