Chapter 14, Problem 4SP

(Financial forecasting—percent of sales) Next year’s sales for Cumberland Mfg. are expected to be $22 million. Current sales are $18 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. Cumberland estimates that current assets will rise in direct proportion to the increase in sales but that its fixed assets will increase by only $150,000. Currently, Cumberland has $2 million in accounts payable (which vary directly with sales), $1 million in long-term debt (due in 10 years), and common equity (including $4 million in retained earnings) totaling $6.5 million. Cumberland plans to pay $750,000 in common stock dividends next year.

1. a. What are Cumberland’s total financing needs (that is, total assets) for the coming year?
2. b. Given the firm’s projections and dividend payment plans, what are its discretionary financing needs?
3. c. Based on your projections, and assuming that the $150,000 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?