Mini Case

Mini Case

Additional Financing Needed (AFN)

Sue Wilson, the new financial manager of Northwest Chemicals (NWC), an Oregon producer of specialized chemicals for use in fruit orchards, must prepare a financial forecast for 2010. NWC’s 2009 sales were $2 billion, and the marketing department is forecasting a 25% increase for 2010. Sue thinks the company is operating at full capacity in 2009. The 2009 financial statements are given in Tables 1 & 2.

Assume that you were recently hired as Sue’s assistant, and your first major task is to help her develop a forecast of any additional funds needed to finance the growth in sales expected in 2010. Assume that (1) NWC was operating at full capacity in 2009 with respect to all its assets, (2) that all assets must grow proportionally with sales, (3) that accounts payable and accruals will also grow in proportion to sales, and (4) that the 2009 profit margins and dividend payout will be maintained. Under these conditions, what will the company’s financial requirements be for the coming year? Determine the additional funds needed, AFN.

Estimate the 2010 financial requirements using a constant ratio approach, making an initial forecast of each account starting with the income statement and then the balance sheet. You could try at least one additional “pass” to determine the effects of the “financial feedbacks” from any sale of debt. When doing this problem, assume (1) that each type of asset, as well as accounts payables/accruals, and variable costs will grow at the same rate as sales; (2) that the dividend payout ratio is held constant at 30 percent; (3) that external funds needed are financed by debt (notes payable will not change and no new common stock will be issued) ; and (4) that all debt (notes payable and long-term debt) carries an interest rate of 8 percent.

|Table 1: | | |

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|I. Income Statement...