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1. Baldwin Products Company anticipates reaching a sales level of $6 million in one year. The company expects net income during the next year to equal $400,000. Over the past several years, the company has been paying $50,000 in
dividends to its stockholders. The company expects to continue this policy for at least the next year. The actual balance sheet and income statement for Baldwin during 2005 are attached.
a. Using the percentage of sales method, calculate the additional financing Baldwin Products will need over the next year at the $6 million sales level. Show the pro forma balance sheet for the company as of December 31, 2006, assuming a sales level of $6 million is reached. Assume that all assets vary proportionally with sales. Accounts payable is the only liability that
varies proportionally with sales. Assume that the additional financing needed is obtained in the form of additional notes payable (in other words, assume that notes payable is the "plug" figure).
b. Suppose that the Baldwin Products' management feels that the average collection period on its additional sales?that is, sales over $4 million? Will be 60 days, instead of the current level. By what amount will this increase in the average collection period increase the financing needed by the company over the next year?
c. If the Baldwin Products' banker requires the company to maintain a current ratio equal to 1.6 or greater, what is the maximum amount of additional financing that can be in the form of bank borrowings (notes payable)? What other potential sources of financing are available to the company?
4. Prepare a cash budget for Rotor Products, Inc. for the second quarter of 2006, based on the following information. The marketing department has provided you with the following sales estimates (attached), all of which are for cash:
The company estimates its purchases at 60 percent of next month's sales, and payments for those purchases are budgeted to lag the purchases by 1 month.
Various disbursements have been estimated as attached.
In addition, a tax payment of $55,000 is due on April 15. The company's projected cash balance at the beginning of April is $60,000, and the company desires to maintain a balance of $50,000 at the end of each month.
8. Appalachian Registers, Inc. (ARI) has current sales of $50 million. Sales are expected to grow to $75 million next year. ARI currently has accounts receivable of $10 million, inventories of $15 million, and net fixed assets of $20 million. These assets are expected to grow at the same rate as sales over the next year. Accounts payable are expected to increase from their current level of $10 million to a new level of $13 million next year. ARI wants to increase its cash balance at the end of next year by $2 million over its current cash balances, which average $4 million. Net income next year is forecasted to be $10 million. Next year, ARI plans to pay dividends of $1 million, up from $500,000 this year. ARI's marginal tax rate is 34 percent. How much external financing does ARI require next year?
10. The CFO of IPOD Accessories, Inc. has asked for your help in estimating the firm's additional financing needed for next year. The CFO has provided the following information to help you with your task: Sales are forecasted to increase by $450,000. Total assets will increase by 80 percent of increase in sales. Current liabilities will increase by 30 percent of increase in sales. Net income is projected to equal $125,000. Projected dividend payments will equal $35,000.
The solution describes the additional financing requirements for Baldwin Products. In addition, the effects of an increase in sales collections period and the maximum financing available under current ratio restrictions imposed by lenders. Viewable as an Excel attachment.