Part 4 Ch 12

Part 4 Ch 12 - CHAPTER 12 INTEGRATIVE PROBLEM 12-13 SUE...

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CHAPTER 12 INTEGRATIVE PROBLEM 160 12-13 SUE WILSON IS THE NEW FINANCIAL MANAGER OF NORTHWEST CHEMICALS (NWC), AN OREGON PRODUCER OF SPECIALIZED CHEMICALS SOLD TO FARMERS FOR USE IN FRUIT ORCHARDS. SHE IS RESPONSIBLE FOR CONSTRUCTING FINANCIAL FORECASTS AND FOR EVALUATING THE FINANCIAL FEASIBILITY OF NEW PRODUCTS. PART I. FINANCIAL FORECASTING SUE MUST PREPARE A FINANCIAL FORECAST FOR 2006 FOR NORTHWEST. NWC’S 2005 SALES WERE $2 BILLION, AND THE MARKETING DEPARTMENT IS FORECASTING A 25 PERCENT INCREASE FOR 2006. SUE THINKS THE COMPANY WAS OPERATING AT FULL CAPACITY IN 2005, BUT SHE IS NOT SURE ABOUT THIS. THE 2005 FINANCIAL STATEMENTS, PLUS SOME OTHER DATA, ARE GIVEN IN TABLE IP12-1. TABLE IP12-1. FINANCIAL STATEMENTS AND OTHER DATA ON NWC ($ MILLIONS) A. 2005 BALANCE SHEET CASH & SECURITIES $ 20 ACCOUNTS PAYABLE AND ACCRUALS $ 100 ACCOUNTS RECEIVABLE 240 NOTES PAYABLE 100 INVENTORIES 240 TOTAL CURRENT LIABILITIES $ 200 TOTAL CURRENT ASSETS $ 500 LONG-TERM DEBT 100 COMMON STOCK 500 NET FIXED ASSETS 500 RETAINED EARNINGS 200 TOTAL ASSETS $1,000 TOTAL LIABILITIES AND EQUITY $1,000 B. 2005 INCOME STATEMENT SALES $2,000.00 LESS: VARIABLE COSTS (1,200.00) FIXED COSTS ( 700 .00) EARNINGS BEFORE INTEREST AND TAXES $ 100.00 INTEREST ( 16 .00) EARNINGS BEFORE TAXES $ 84.00 TAXES (40%) ( 33 .60) NET INCOME $ 50 .40 DIVIDENDS (30%) $ 15 .12 ADDITION TO RETAINED EARNINGS $ 35.28
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161 C. 2005 KEY RATIOS NWC INDUSTRY PROFIT MARGIN 2.52% 4.00% RETURN ON EQUITY 7.20% 15.60% DAYS SALES OUTSTANDING (360 DAYS) 43.20 DAYS 32.00 DAYS INVENTORY TURNOVER 5.00 x 8.00 x FIXED ASSETS TURNOVER 4.00 x 5.00 x TOTAL ASSETS TURNOVER 2.00 x 2.50 x TOTAL DEBT RATIO 30.00% 36.00% TIMES INTEREST EARNED 6.25 x 9.40 x CURRENT RATIO 2.50 x 3.00 x PAYOUT RATIO 30.00% 30.00% ASSUME THAT YOU WERE RECENTLY HIRED AS SUE’S ASSISTANT, AND YOUR FIRST MAJOR TASK IS TO HELP HER DEVELOP THE FORECAST. SHE ASKED YOU TO BEGIN BY ANSWERING THE FOLLOWING SET OF QUESTIONS: A. ASSUME THAT NWC WAS OPERATING AT FULL CAPACITY IN 2005 WITH RESPECT TO ALL ASSETS. ESTIMATE THE 2006 FINANCIAL REQUIREMENT USING THE PROJECTED FINANCIAL STATEMENT APPROACH, MAKING AN INITIAL FORECAST PLUS ONE ADDITIONAL “PASS” TO DETERMINE THE EFFECTS OF “FINANCING FEEDBACKS.” ASSUME THAT (1) EACH TYPE OF ASSET AS WELL AS PAYABLES, ACCRUALS, AND FIXED AND VARIABLE COSTS GROW AT THE SAME RATE AS SALES; (2) THE PAYOUT RATIO IS HELD CONSTANT AT 30 PERCENT; (3) EXTERNAL FUNDS NEEDED ARE FINANCED 50 PERCENT BY NOTES PAYABLE AND 50 PERCENT BY LONG-TERM DEBT (NO NEW COMMON STOCK WILL BE ISSUED); AND (4) ALL DEBT CARRIES AN INTEREST RATE OF 8 PERCENT.
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ANSWER : I. INCOME STATEMENT: 2006 Forecast 2005 Forecast Feed- Actual Basis 1st Pass Back 2nd Pass Sales $2,000.00 x 1.25 $2,500.00 $2,500.00 Less: Var. costs (60%) (1,200.00) x 1.25 (1,500.00) 1,500.00 Fixed costs (700.00) x 1.25 (875.00) (875.00) EBIT $ 100.00 $ 125.00 $ 125.00 Interest (8%) (16.00) (16.00) +14.34 a (30.34) EBT $ 84.00 $ 109.00 $ 94.66 Taxes (40%) (33.60) (43.60)
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This note was uploaded on 03/31/2012 for the course BUS 200 taught by Professor Bens during the Spring '12 term at FIU.

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Part 4 Ch 12 - CHAPTER 12 INTEGRATIVE PROBLEM 12-13 SUE...

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