Foundations Of Finance
10th Edition
ISBN: 9780134897264
Author: KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher: Pearson,
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Textbook Question
Chapter 14, Problem 4SP
(Financial forecasting—percent of sales) Next year’s sales for Cumberland Mfg. are expected to be $22 million. Current sales are $18 million, based on current assets of $5 million and fixed assets of $5 million. The firm’s net profit margin is 5 percent after taxes. Cumberland estimates that current assets will rise in direct proportion to the increase in sales but that its fixed assets will increase by only $150,000. Currently, Cumberland has $2 million in accounts payable (which vary directly with sales), $1 million in long-term debt (due in 10 years), and common equity (including $4 million in
- 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 $150,000 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?
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(Financial forecasting—percent of sales)
Next year’s sales for Cumberland Mfg. are expected to be $22 million.
Current sales are $18 million, based on current assets of $5 million and fixed assets of $5 million.
The firm’s net profit margin is 5 percent after taxes.
Cumberland estimates that current assets will rise in direct proportion to the increase in sales but that its fixed assets will increase by only $150,000.
Currently, Cumberland has $2 million in accounts payable (which vary directly with sales), $1 million in long-term debt (due in 10 years), and common equity (including $4 million in retained earnings) totaling $6.5 million.
Cumberland plans to pay $750,000 in common stock dividends next year.
Required:
What are Cumberland’s total financing needs (that is, total assets) for the coming year?
Given the firm’s projections and dividend payment plans, what are its discretionary financing needs?
Based on your projections, and assuming that the $150,000 expansion in fixed assets…
(Financial forecasting percent of sales) Tulley Appliances, Inc. projects next year's sales to be $19.9 million. Current sales are at $15.3 million, based on current assets of $5.1 million and fixed
assets of $4.9 million. The firm's net profit margin is 5.3 percent after taxes. Tulley forecasts that current assets will rise in direct proportion to the increase in sales, but fixed assets will increase by
only $110,000. Currently, Tulley has $1.6 million in accounts payable (which vary directly with sales), $1.9 million in long-term debt (due in 10 years), and common equity (including $3.8 million in
retained earnings) totaling $6.3 million. Tulley plans to pay $501,000 in common stock dividends next year.
a. What are Tulley'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 $110,000 expansion in fixed assets will…
Sambonoza Enterprises projects its sales next year to be $4 million and expects to earn 5 percent of that amount
after taxes. The firm is currently in the process of projecting its financing needs and has made the following
assumptions (projections):
1. Current assets will equal 20 percent of sales, and fixed assets will remain at their current level of $1 million.
2. Common equity is currently $0.8 million, and the firm pays out half its after-tax earnings in dividends.
3. The firm has short-term payables and trade credit that normally equal 10 percent of sales, and it has no long-
term debt outstanding.
What are Sambonoza's financing requirements (i.e., total assets) and discretionary financing needs (DFN) for the
coming year?
Chapter 14 Solutions
Foundations Of Finance
Ch. 14 - Prob. 1RQCh. 14 - Discuss the shortcomings of the percent of sales...Ch. 14 - Prob. 3RQCh. 14 - Prob. 4RQCh. 14 - Prob. 1SPCh. 14 - Prob. 2SPCh. 14 - (Financial forecastingdiscretionary financing...Ch. 14 - (Financial forecastingpercent of sales) Next years...Ch. 14 - Prob. 5SPCh. 14 - (Percent of sales forecasting) Which of the...
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