(Principles of Finance, course text Foundations of Finance)
14-4. (Financial forecasting—percent of sales) Tulley Appliances
Inc. projects next year’s sales to be $20 million. Current sales
are $15 million, based on current assets of $5 million and fixed
assets of $5 million. The firm’s net profit margin is 5 percent
after taxes. Tulley forecasts that its current assets will rise in
direct proportion to the increase in sales, but that its fixed
assets will increase by only $100,000. Currently, Tulley has $1.5
million in accounts payable (which vary directly with sales), $2
million in long-term debt (due in 10 years), and common equity
(including $4 million in retained earnings) totaling $6.5 million.
Tulley plans to pay $500,000 in common stock dividends next
a.What are Tulley’s total financing needs (i.e., total assets)
for the coming year?
b.Given the firm’s projections and dividend payments plans, what
are its discretionary financing needs?
c.Based on your projections, and assuming that the $100,000
expansion in fixed assets will occur, what is the largest increase
in sales the firm can support without having to resort to the use
of discretionary sources of financing?