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Cumberland industries financial planners must forecast the company's financial results for coming year.

Cumberland industries financial planners must forecast the company's financial results for coming year. The forecast will be based on the forecasted financial statement method, and any additional funds needed will be obtained by using a mix of notes payable, long-term debt, common stock. no preferred stock will be issued. Data for the problem, including Cumberland industries balance sheet and income statement are as follows. Use the data to answer the following questions.

a. Cumberland Industries has had the following sales since 2004. Assuming the historical trend continues, what will sales be in 2010?

year Sales
2004 $129,215,000
2005 $180,901,000
2006 $235,252,000
2007 $294,065,000
2008 $396,692,000
2009 $455,150,000

Base your forecast on a spreedsheet regression analysis of the 2004-2009 sales. By what percentage are sales predicted on increase in 2010 over 2009? is the sales growth rate increasing or decreasing?

b. Cumberland’s management believes that the firm will actually experience a 20 percent increase in sales during 2010. Construct 2010 pro forma financial statements. Cumberland will not issue any new stock or long-term bonds. Assume Cumberland will carry forward its current amounts of short-term investments and notes payable, prior to calculating AFN. Assume that any Additional Funds Needed (AFN) will be raised as notes payable (if AFN is negative, Cumberland will purchase additional short-term investments). Use an interest rate of 9 percent for short-term debt (and for the interest income on short-term investments) and a rate of 11 percent for long-term debt. No interest is earned on cash. Use the beginning of year debt balances to calculate net interest expense. Assume that dividends grow at an 8 percent rate.

c. Now create a graph depicting the sensitivity of AFN for the coming year to the sales growth rate. To make this graph, compare the AFN at sales growth rates of 5%, 10%, 15%, 20%, 25%, and 30%.

d. Calculate the Net Operating Working Capital (NOWC), Total Operating Capital, and NOPAT for 2009 and 2010. Also, calculate the FCF for 2010.

e. Suppose Cumberland can reduce its inventory to sales ratio to 5 percent and its cost to sales ratio to 83 percent. What happens to AFN and FCF?

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