Lindsey Insurance Co. has current sales of $10 million and predicts next year’s

Question

Lindsey Insurance Co. has current sales of $10 million and predicts next year’s sales will grow to $14 million. Current assets are $3 million and fixed assets are $4 million. The firm’s net profit margin is 7 percent after taxes. Presently, Lindsey has $900,000 in accounts payable, $1.1 million in long-term debt, and $5 million (including $2.5 million in retained earnings) in common equity. Next year, Lindsey projects that current assets will rise in direct proportion to the forecasted sales, and that fixed assets will rise by $500,000. Lindsey also plans to pay dividends of $400,000 to common shareholders.

a ) What are Lindsey's total financing needs for the upcoming year?

b) Given the information above, what are Lindsey's discretionary financing needs?

Please explain and show the math

Explanation / Answer

a. Projected Financing Needs = Projected Total Assets

= Projected Current Assets + Projected Fixed Assets

= ($3m/$10m) × $14m + $4m + $.5m = $8.7m

b. Discretionary financing needs = Projected Current Assets + Projected Fixed Assets -accounts payable- Present Long Term Debt - Present Owner’s Equity - [Projected Net Income - Dividends] - Spontaneous Financing

= ($3m/$10m) × $14m + $4.5m - $1.1m - $5m - [.07 × $14m - $.4m] - ($.9m/$10m) × $14m

Discretionary financing needs = $4.2m + $4.5m - $6.1m - $.58m - $1.26m = $.76m

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