Refine Cash Balance and Consider Capital Structure Consider the following actual

Question

Refine Cash Balance and Consider Capital Structure

Consider the following actual FY2017 data and a forecast of FY2018 selected balance sheet and income statement numbers.

a. Calculate the company's normal cash level as a percentage of sales.
Round answer to one decimal place (ex: 0.2345 = 23.5%)
Answer%

b. Determine the amount of adjustment needed to return cash to a normal level. Is an adjustment warranted? If an adjustment is not warranted, enter zero as the amount needed to return cash to a normal level.
If the adjustment is a decrease, use a negative sign with your answer.
Round answer to the nearest whole number, if applicable.
$Answer

For parts d through h, complete the table below.

d. Adjust marketable securities so the forecasted cash balance is at its normal level. What affect does this have on the forecasted liabilities-to-equity ratio?

e. Adjust long-term debt so the forecasted cash balance is at its normal level. What effect does this have on the forecasted liabilities-to-equity ratio? f. Adjust treasury stock so the forecasted cash balance is at its normal level. What effect does this have on the forecasted liabilities-to-equity ratio?

g. Adjust both long-term debt and marketable securities so as to adjust the forecasted cash balance. In so doing, make sure we preserve the company’s liabilities-to-equity ratio. (Hint: Use “Goal Seek” under the “What-If Analysis” in Excel to determine the proportion of long-term debt versus treasury stock needed to ensure the forecasted liabilities-to-equity ratio remains at its historical level.)

h. Adjust both long-term debt and treasury stock so as to adjust the forecasted cash balance. In so doing, make sure we preserve the company’s liabilities-to-equity ratio. (Hint: Use “Goal Seek” under the “What-If Analysis” in Excel to determine the proportion of long-term debt versus treasury stock needed to ensure the forecasted liabilities-to-equity ratio remains at its historical level.)

Do not use any negative signs with your answers.

Round liabilities to equity ratios to two decimal places.

Hints

Part g. - Marketable securities is adjusted by $704. Debt is adjusted by $704.

Part h. - Debt is adjusted by $966. Treasury stock is adjusted by $170.

$ millions FY2017 Actual FY2018 Est. Net sales $29,009 $32,102 Total assets 14,592 16,051 Total liabilities 8,755 9,923 Total equity 5,837 6,128 Cash 2,918 4,378 Marketable securities 730 730 Total liabilities (inc. long-term debt) 8,755 9,923 Treasury stock (2,189) (2,627)

Explanation / Answer

Ans a. Year 2017. Cash as % of sales=2918/29009X100= 10.1

Year 2018. Cash as % of sales=4378/32102X100=13.6

Ans b. In order to bring down cash to sales % ratio to 2017 levels we have to decrease cash amounting to $32102X10.1%=$ 3242.3

Thus cash to be withdrawn=$3242.3-$4378=-$1136

Ans d. The above amount of cash to be withdrawn is invested in Marketable Securities. Thus the amount of Marketable Securities=$730+$1136=$1866. As Marketable securities is an asset, hence there is no impact on liabilities to equity ratio.

Ans e. If we adjust the $1136 excess cash with long term debt the amount of long term debt comes down to

$ 9923-$ 1136=$8787. Thus the forecast liabilities to equity ratio comes down to 8787/6128 ie 1.43 from 9923/6128 ie 1.62.

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