# Cumberland Industries - AFN

I am having trouble setting up this spreadsheet for part B of this problem. Any help appreciated. Thanks.

Cumberland Industries' financial planners must forecast the company's financial results for the coming year. The forecast will be based o the percent of sales method, and any additional funds needed will be obtained as notes payable.

a. Assuming the historical trend continues, what will sales be in 2006? Base your forecast on a spreadsheet regression analysis of the 2000-2005 sales data above, and include the summary output of the regression in your answer. By what percentage are sales predicted to increase in 2006 over 2005? Is the sales growth rate increasing or decreasing?

Do not have to do part A

Here are the company's historical sales. Hint: Use the Trend function to forecast sales for 2006.

Year Sales Growth Rate

2000 129,215,000

2001 180,901,000

2002 235,252,000

2003 294,065,000

2004 396,692,000

2005 455,150,000

2006 515,465,267

% Increase in Predicted Sales for 2006 over 2005:

2005 Sales 455,150,000

2006 Sales 515,465,267

% increase 13.25% Note: This growth rate has been declining over time.

b. Cumberland's management believes that the firm will actually experience a 20 percent increase in sales during 2006. Construct 2006 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.

Key Input Data: Used in the

forecast

Tax rate 40%

Dividend growth rate 8%

S-T rd 9%

L-T rd 11%

December 31 Income Statements:

(in thousands of dollars)

Forecasting 2005 2006 2006

2005 basis Ratios Inputs Forecast

Sales $455,150 Growth 20.00% $546,180

Expenses (excluding depr. & amort.) $386,878 % of sales

EBITDA $68,273

Depreciation and Amortization $7,388 % of fixed assets

EBIT $60,885

Net Interest Expense $8,575 Interest rate x beginning of year debt

EBT $52,310

Taxes (40%) $20,924

Net Income $31,386

Common dividends $12,554 Growth

Addition to retained earnings (DRE) $18,832

Cumberland Industries December 31 Balance Sheets

(in thousands of dollars)

Forecasting 2005 2006 2006

2005 basis Ratios Inputs Without AFN AFN

Assets:

Cash and cash equivalents $91,450 % of sales

Short-term investments $11,400 Previous

Accounts Receivable $103,365 % of sales

Inventories $38,444 % of sales

Total current assets $244,659

Fixed assets $67,165 % of sales

Total assets $311,824

Liabilities and equity

Accounts payable $30,761 % of sales

Accruals $30,477 % of sales

Notes payable $16,717 Previous

Total current liabilities $77,955

Long-term debt $76,264 Previous

Total liabilities $154,219

Common stock $100,000 Previous

Retained Earnings $57,605 Previous + DRE

Total common equity $157,605

Total liabilities and equity $311,824

Required assets =

Specified sources of financing =

Additional funds needed (AFN) =

Required additional notes payable =

Additional short-term investments =

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%.

Don't have to do C

We can use a data table to answer this question:

Sales 2006 AFN

Growth rate $0

d. Calculate the Net Operating Working Capital (NOWC), Total Operating Capital, and NOPAT for 2005 and 2006. Also, calculate the FCF for 2006.

Don't have to do d

Net Operating Working Capital

NOWC05 = Operating CA - Operating CL

= -

=

NOWC06 = Operating CA - Operating CL

= -

=

Total Operating Capital

TOC05 = NOWC + Fixed assets

= +

=

TOC06 = NOWC + Fixed assets

= +

=

Net Operating Profit After Taxes

NOPAT05 = EBIT x ( 1 - T )

= x

=

NOPAT06 = EBIT x ( 1 - T )

= x

=

Free Cash Flow

FCF06 = NOPAT - Increase in TOC

= -

=

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?

don't have to do part E

Input Base Case New Scenario

Inv. / Sales 0.0% 5.0% Note: we used the Scenario Manager.

Costs / Sales 0.0% 83.0%

FCF

AFN

#### Solution Summary

The solution explains how to calculate the AFN for Cumberland Industries. ONLY PART B of the question is answered in the solution