Question

(a) Daniel Sawyer, the CEO of the Sawyer Group, is initiating planning for the company's operations next year, and he wants you to forecast the firm's additional funds needed (AFN). The firm is operating at full capacity. Data for use in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year? Dollars are in millions. Last year’s sales = S0 $350 Last year's accounts payable $40 Sales growth rate = g 30% Last year's notes payable $50 Last year’s total assets = A0* $500 Last year's accruals $30 Last year’s profit margin = PM 5% Target payout ratio 60%

S =S,(1 +Growth rate) = $350X (1+0.30) = $455 AS = S.-S. = $455-$350 = $105 RR =1- Payout ratio =1-0.60 =0.40 or 40% AFN= (4**as - ( asPM«5 «(RR) - (590)+(59105)($49:53°)($105) – 566x5438*40% $40+$30 $350X ($105) -5% x $455 x 40% = $119.9

(b) Weber Interstate Paving Co. had $450 million of sales and $225 million of fixed assets last year, so its FA/Sales ratio was 50%. However, its fixed assets were used at only 65% of capacity. If the company had been able to sell off enough of its fixed assets at book value so that it was operating at full capacity, with sales held constant at $450 million, how much cash (in millions) would it have generated?

Please help with part B

Answer 1

Sales with 100%capacity = sales/ acutal capacity utilised

sales = 450m

actual capacity = 65%

Sales with 100% capacity = 450/65%

= 692.31m

FA to sales ratio if operated with full capacity = FA / sales at 100% capacity

= 225/692.31

= 32.50%

required FA = sales * FA/sales ratio at full capacity

= 450*32.5%

= 146.25m

cash = Actual FA - Required FA

= 225-146.25

= 78.75m