Space Age MaterialsWorking Capital Management

Directed

1. External Funds Needed for 1993EFN = (A/S)DS – (L/S)DS – MS(1-d) = (49.97%)$17.75 – (1.96%)17.75 – $5.41(66.74% = $4.91

2. Forecast of the firm’s financial statements and EFN for 1993: (in millions of dollars)

1992Percentage of

sales 1993Balance Sheet

Cash and Securities $ 2.18 2.46% $ 2.62 Accounts receivable $ 7.10 8.00% $ 8.51 Inventories $ 8.43 9.50% $ 10.12 Current assets $ 17.71 N.A. $ 21.25 Net fixed assets $ 26.63 30.01% $ 31.96 Total Assets $ 44.34 N.A. $ 53.21 Accounts payable $ 0.84 0.95% $ 1.01 Notes Payable $ 1.23 1.39% $ 1.48 Accrued wages & taxes $ 0.90 1.01% $ 1.08 Current liabilities $ 2.97 N.A. $ 3.56 Long-term debt $ 12.57 N.A. $ 12.57 Total liabilities $ 15.54 N.A. $ 16.13 Common stock $ 17.49 N.A. $ 17.49 Retained earnings $ 11.31 N.A. $ 15.41 Total common equity $ 28.80 N.A. $ 32.90 Total liabilities & equity $ 44.34 N.A. $ 49.03 External funds needed (EFN) $ 0.00 N.A. $ 4.18 Income StatementSales $ 88.73 100.00% $ 106.48 Cost of goods sold $ (79.58) 89.69% $ (95.50)EBIT $ 9.15 10.31% $ 10.98 Interest Expense $ (1.64) N.A. $ (1.64)Taxable income $ 7.51 N.A. $ 9.34 Taxes $ (3.00) N.A. $ (3.74)Net income $ 4.51 N.A. $ 5.60 Dividends $ (1.50) N.A. $ (1.50)Additions to R.E. $ 3.01 N.A. $ 4.10

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4. Fixed assets are being operated at only 80% of capacity in 1992. What effect would this have on your projected external capital requirement for 1993?

Full Capacity Sales (1992) Projected Sales (1993)$110.91 $106.48

At full capacity, all assets increase proportionally with sales; Since projected sales < full capacity sales, no increase in fixed assets is needed;

5. In the 80% of capacity utilization scenario, excess funds will be generated. What would you recommend doing with the money?

I would recommend the firm purchase some marketable securities such as: treasury bills, some commercial paper, bank certificates of deposits, and money market funds. These securities can be held and managed alone with demand deposits. Marketable securities can also be used to build up cash. The cash can then be used to pay out as dividends so stockholders can invest.

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7. In general, what impacts do a firm’s dividend policy, profitability, and capital intensity have on its financing requirements?

First, the rate of sustainable growth depends on the three factors mention above. These factors require the same growth rate across the board to effect to a firms’ survival. Thus, if assets grow by a certain dollar amount than liabilities and equity must grow by the same amount. The results can show a positive relationship between return on assets, dividend policy, and growth in sales. In addition, the results can also reveal negative associations between return on assets and dividend payout ratio, and leverage.

8. What assumptions are implied when one uses the percentage of sales method? Under what circumstances would the percentages of sales method produce a valid, as opposed to an incorrect, forecast? How would you answer?

The assumptions they are implied when using the percentage sale methods are: Growth rate Operating cost/sales Receivable/sales

Inventories/sales Debt ratio Payout ratio

These assumptions all fall under the input section of a forecasted financial statement. These assumptions are adjustable and under management control. Under these assumptions, the lower the sales the lower the bad debt, storage cost, and there will be an increase in profits.

Percentage of sales method will produce a valid forecast if the following are done: There is a comprehensive look at future financial performance; The pro forma income statement and balance sheet reflects the firm anticipated future

decisions; and

Future relationship between various elements of cost of sales will be similar past relationships.

9. What are some other methods that could be used to forecast the asset and liability balances and, thus, the forecasted financial requirements? If the senior executives asked you to incorporate these procedures into your analysis, how would you do it, how long would it take, and what additional data would you require?

Some other methods that can be used to forecast the asset and liability balances is conducting regression analysis to predict item such as inventories. It could also be a good idea to examine specific asset ratios to get a better idea of the effects of the firm’s financial position. I would incorporate these procedures in my analysis by modifying some accounts such as accounts

receivable, inventory as well as some “what if” studies. The length of time it would take to get all of this done would depend on how rapid assets are increasing or decreasing. As additional data, I would request things such as pass sale figures and financial statements.

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