Reference no: EM132489120
The management team at Taylor, Inc. is working on the company's 2019 pro-forma balance sheet and income statement, and wishes to find out the amount of additional external funds it will need in 2019, based on the following assumptions: a. Sales are expected to double in 2019. b. The company is operating at full capacity. c. All operating assets (cash included) and spontaneous liabilities are expected to remain at their same proportion of sales as in 2018. Misc. assets (which are non operating assets) will remain unchanged at $7,500. d. Cost of Goods Sold and Operating Expenses are also expected to remain equal in proportion of sales. e. Management expects Interest rates to fall in 2019 so that interest expenses will remain constant as a percentage of sales, even if the level of bank debt increases in 2019. In addition, assume that interest rates are the same for short-term and long-term debt. f. The company's tax rate is 40% and the firm does not pay dividends.
Question 1) What are the Additional Funds Needed (AFN) for the year 2019, using both the AFN formula and a pro-forma balance sheet using the pct. of sales method? Both methods should give you the same result.
Question 2) Now assume that, in 2019, while doubling its level of sales, the company wishes to improve its Days Payable to a more acceptable level of 60 days. What will then be the level of AFN?
Question 3) In addition to reducing its Days Payable, the firm also wants to bring its Debt/Equity ratio as close as possible to, but not to exceed 2/1, and its current ratio as close as possible to, but not to fall below 2/1. How would this newly calculated level of AFN (from Question 2) be allocated among additional sources of funds, i.e., notes payable (N/P), long-term debt, and/or newly issued common stock?
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