Financing Forecasting: The balance sheet of the Thompson Crown Company (TCC) fol

Question

Financing Forecasting: The balance sheet of the Thompson Crown Company (TCC) follows:

Thompson Crown Company Balance Sheet, December 31, 2015 ($ millions)

Current assets $10

Accounts payable $5

Net fixed assets 15

Notes payable 0

Total $25

Bonds payable 10

Common equity 10

Total $25

TCC had sales for the year ended 12/31/15 of $50 million. The firm follows a policy of paying all net earnings out to its common stockholders in cash dividends. Thus, TCC generates no funds from its earnings that can be used to expand its operations. (Assume that depreciation expense is just equal to the cost of replacing worn-out assets.)

Questions: (please use excel and show work)

- If TCC anticipates sales of $80 million during the coming year, develop a pro forma balance sheet for the firm for 12/31/16. Assume that current assets vary as a percent of sales, net fixed assets remain unchanged, and accounts payable vary as a percent of sales. Use notes payable as a balancing entry.

- How much “new” financing will TCC need next year?

- What limitations does the percent-of-sales forecast method suffer from? Discuss briefly.

Explanation / Answer

Financial Forecasting is an estimation of a firm's future financial consequences using historical data.

The financing requirement is the total funds that a company needs in case if the business cash at the end of the period is less than the required level.

The owner's equity that is the difference between the total assets and total liabilities is the net funding required.

a) The proforma balance sheet for the year ending 2016 is as follows:-

Notes:- Notes Payable is the balancing entry.

b)The total financing requirement would be $ 31 million for the year 2016 out of which the existing source would finance $ 28 million.Balance of $ 3 million would be the new financing requirement.

c) The following are the limitations of percent of sales forecast method:-

1. All the assets and liabilities do not remain proportionate to the sales.

2. With change in level of sales the degree of change in the assets and liabilities may vary.

3.Sales may also increase due to change of company policies which may not lead to proportionate change in assets and liabilities.For Example,a change in credit policy would increase sales but increase in sundry creditors would be much higher.

31/12/2016 % of sales (sales $ 50 million) 12/31/2016(sales $ 80 million) Current Assets $10,000,000 20 % $ 80,000,000 x 0.20= $ 16,00,000 Net Fixed Assets $ 15,000,000 $ 80,000,000 x 0.20=$ 15,000,000 Total Assets $25,000,000 $ 31,000,000 Accounts Payable $ 5,000,000 10% $ 80,000,000 x 0.10=$ 8,000,000 Notes Payable $ 0 na $ 3,000,000 Bond Payable $ 10,000,000 $ 10,000,000 Total Liabilities $ 15,000,000 $21,000,000 Common Stock $ 10,000,000 NA $10,000,000 Common Equity $ 10,000,000 $10,000,000 Projected Source of Financing $25,000,00 $31,000,000

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