(Related to Checkpoint 17.1) (Discretionary financing needs) In the spring of 20
ID: 2745399 • Letter: #
Question
(Related to Checkpoint 17.1)(Discretionary financing needs)In the spring of 2013 the Caswell Publishing Company established a custom publishing business for its business clients. These clients consisted principally of small- to medium-size companies in Round Rock, Texas. However, the company's plans were disrupted when they landed a large printing contract from Dell Computers Corp. (DELL) that they expected would run for several years. Specifically, the new contract would increase firm revenues by 100 percent. Consequently, Caswell's management knew they would need to make some significant changes in firm capacity, and quickly. The following balance sheet for 2013 and pro forma balance sheet for 2014 reflect the firm's estimates of the financial impact of the 100 percent revenue growth
Caswell Publishing Co.
a. The discretionary financing needs are $_____________(Round to the nearest dollar.)
b.Given the nature of the new contract and the specific needs for financing that the firm expects, what recommendations might you offer to the firm's chief financial officer as to specific sources of financing the firm should seek to fulfill its DFN?(Select all the choices that apply below.)
A.Retained earnings.
B.Sale of fixed assets.
C.Common stock.
D.Long-term debt.
E.Notes payable.
Caswell Publishing Co. Caswell Publishing Co. Balance Sheet for 2010 Pro Forma Balance Sheet for 2011 100% Current assets 12100000 Current assets 24200000 Net fixed assets 17810000 Net fixed assets 35620000 Total 29910000 Total 59820000 Accounts payable 1910000 Accounts payable 3820000 Accrued expenses 2080000 Accrued expenses 4160000 Notes payable 1460000 Notes payable 1460000 Current liabilities 5450000 Current liabilities 9440000 Long-term debt 6500000 Long-term debt 6500000 Total liabilities 11950000 Total liabilities 15940000 Common stock (par) 1040000 Common stock (par) 1040000 Paid-in-capital 1910000 Paid-in-capital 1910000 Retained earnings 15010000 Retained earnings 15010000 Common equity 17960000 Common equity 17960000 Total 29910000 Projected sources of financing 33900000 Discretionary financing needs Total financing needs=Total assetsExplanation / Answer
The discretionary financing needs is calculated by ascertaining in projected balance sheet
Projected increase in assets in proportion to change in sales which is 100% growth
Projected increase in liabilities in proportion to change in sales which is 100% . the liabilities will include accounts payable , accrued expenses
Discretionary financing needs = projected increase in assets – projected increase in liabilities
Where
Projected increase in assets = $ 29,910,000
Projected increase in liabilities = $1,910,000 +$2,080,000 = $3,990,000
DFN = $29,910,000 - $3,990,000
= $25,920,000
b)
As the firm has received order from Dell for printing orders for long term the recommendations on sources of financing to CFO for fullflling the GAP of DFN would be as under
a) retained earnings – as there will be 100% increases in turnover and with capacity enhancement of 100% in fixed asset the margin of profit will definitely increase , the profit after distribution of dividend of 50% can be added in retained earnings is a viable source of funding
b) sale of fixed asset is not recommended as the there is growth potential for long term and capacity enhancement is required to cater the growing demand
c) Common stock – issue of common stock will be option the care should be taken to debt equity ratio should be kept at 1.5 which is manageable
d) Long term debt increase should cater to financing the fixed asset increase for capacity enhancement
e) notes payable should be basically used for managing working capital requirements
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