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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
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
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%


Solution Summary

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