Tulley Appliances Inc. projects next years sales to be $20 million.
Current sales are $15 million, based on current assets of $5 million and
fixed assets of $5 million. The firms net profit margin is 5% after
taxes. Tulley forecasts that its current assets will rise in direct
proportion to the increase in sales, but that its fixed assets will
increase by only $100,000. Currently, Tulley has $1.5 million in
accounts payable (which varies directly with sales), $2 million in long
term debt (due in 10 years), and common equity (including $4 million in
retained earnings) totaling $6.5 million. Tulley plans to pay $500,000
in common stock dividends next year.
A) What are Tulley's total financing needs? (i.e. total assets) for the coming year?
B) Given the firm's projections and dividend payment plans, what are its discretionary financing needs?
C) Based on your projections, and assuming that the $100,000 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?
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