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.

$ 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)

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

10.1%

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.
(1136)

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 $432. Debt is adjusted by $704.
• Part h. - Debt is adjusted by $966. Treasury stock is adjusted by $170.

	d.			g. Debt and	h. Debt and
	Marketable		f. Treasury	Marketable	Treasury
$ millions	Securities	e. Debt	Stock	securities	stock
Total assets	Answer	Answer	Answer	Answer	Answer
Total liabilities	Answer	Answer	Answer	Answer	Answer
Total equity	Answer	Answer	Answer	Answer	Answer
Cash	Answer	Answer	Answer	Answer	Answer
Marketable securities	Answer	Answer	Answer	Answer	Answer
Total liabilities (inc. LT debt)	Answer	Answer	Answer	Answer	Answer
Treasury stock	Answer	Answer	Answer	Answer	Answer
Liabilities	Answer	Answer	Answer	Answer	Answer

complete the table above

Answer 1

Answer:

As per given Question

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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