Space Age Materials

Working Capital Management

Directed

1. External Funds Needed for 1993

EFN = (A/S)DS – (L/S)DS – MS(1-d)
= (49.97%)$17.75 – (1.96%)17.75 – $5.41(66.74%
= $4.91

2. Forecast of the firm’s financial statements and EFN for 1993: (in millions of
dollars)
Percentage of
1992 sales 1993
Balance Sheet
$ $
Cash and Securities 2.18 2.46% 2.62
$ $
Accounts receivable 7.10 8.00% 8.51
$ $
Inventories 8.43 9.50% 10.12
$ $
Current assets 17.71 N.A. 21.25
$ $
Net fixed assets 26.63 30.01% 31.96
$ $
Total Assets 44.34 N.A. 53.21
$ $
Accounts payable 0.84 0.95% 1.01
$ $
Notes Payable 1.23 1.39% 1.48
$ $
Accrued wages & taxes 0.90 1.01% 1.08
$ $
Current liabilities 2.97 N.A. 3.56
$ $
Long-term debt 12.57 N.A. 12.57
$ $
Total liabilities 15.54 N.A. 16.13
$ $
Common stock 17.49 N.A. 17.49
$ $
Retained earnings 11.31 N.A. 15.41
$ $
Total common equity 28.80 N.A. 32.90
Total liabilities & equity $ N.A. $
 44.34 49.03
External funds needed $ $
(EFN) 0.00 N.A. 4.18
Income Statement
$ $
Sales 88.73 100.00% 106.48
$ $
Cost of goods sold (79.58) 89.69% (95.50)
$ $
EBIT 9.15 10.31% 10.98
$ $
Interest Expense (1.64) N.A. (1.64)
$ $
Taxable income 7.51 N.A. 9.34
$ $
Taxes (3.00) N.A. (3.74)
$ $
Net income 4.51 N.A. 5.60
$ $
Dividends (1.50) N.A. (1.50)
$ $
Additions to R.E. 3.01 N.A. 4.10

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4. Fixed assets are being operated at only 80% of capacity in 1992. What
effect would this have on your projected external capital
requirement for 1993?

Full Capacity Sales Projected Sales (1993)

(1992)
$110.91 $106.48

• At full capacity, all assets increase proportionally with sales;

• Since projected sales < full capacity sales, no increase in fixed assets is
needed;

5. In the 80% of capacity utilization scenario, excess funds will be

generated. What would you recommend doing with the money?

I would recommend the firm purchase some marketable securities such as:
treasury bills, some commercial paper, bank certificates of deposits, and money
market funds. These securities can be held and managed alone with demand
deposits. Marketable securities can also be used to build up cash. The cash can
then be used to pay out as dividends so stockholders can invest.
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7. In general, what impacts do a firm’s dividend policy, profitability, and

capital intensity have on its financing requirements?

First, the rate of sustainable growth depends on the three factors mention
above. These factors require the same growth rate across the board to effect
to a firms’ survival. Thus, if assets grow by a certain dollar amount than
liabilities and equity must grow by the same amount. The results can show a
positive relationship between return on assets, dividend policy, and growth in
sales. In addition, the results can also reveal negative associations between
return on assets and dividend payout ratio, and leverage.

8. What assumptions are implied when one uses the percentage of sales
method? Under what circumstances would the percentages of sales
method produce a valid, as opposed to an incorrect, forecast? How
would you answer?

The assumptions they are implied when using the percentage sale methods
are:
• Growth rate • Inventories/sales
• Operating cost/sales • Debt ratio
• Receivable/sales • Payout ratio

These assumptions all fall under the input section of a forecasted

financial statement. These assumptions are adjustable and under
management control. Under these assumptions, the lower the sales the
lower the bad debt, storage cost, and there will be an increase in profits.

Percentage of sales method will produce a valid forecast if the

following are done:
• There is a comprehensive look at future financial performance;
• The pro forma income statement and balance sheet reflects
the firm anticipated future decisions; and
• Future relationship between various elements of cost of sales
will be similar past relationships.

9. What are some other methods that could be used to forecast

the asset and liability balances and, thus, the forecasted
financial requirements? If the senior executives asked you to
incorporate these procedures into your analysis, how
would you do it, how long would it take, and what additional
data would you require?
 Some other methods that can be used to forecast the asset and
liability balances is conducting regression analysis to predict item
such as inventories. It could also be a good idea to examine specific asset
ratios to get a better idea of the effects of the firm’s financial position.
I would incorporate these procedures in my analysis by modifying
some accounts such as accounts receivable, inventory as well as some
“what if” studies. The length of time it would take to get all of this done
would depend on how rapid assets are increasing or decreasing. As
additional data, I would request things such as pass sale figures and
financial statements.

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