Instructions:
Complete the 2006 forecast using the assumptions below. If a line does not have an explicit assumption, you should be able to figure it out through logic (using the structure of the financial statements and/or some simple math). Your forecast should result in entries in all the green-shaded cells below.
The firm does not pay any dividends, so all net income will flow to Net Worth on the Balance Sheet.
We will plug the cash account on the balance sheet using the following formula:
Cash = (Current Liabilities + Net Worth) - (Accounts Receivable + Inventory + Other Current Assets + Net Fixed Assets)
Once your forecast is complete, answer the discussion questions below.
1. What is going on with the cash balance in the forecast? What are the implications of this?
2. Why is the firm having such a problem with its cash account (shrinking every year)? Hint: You might want to compute the Cash Cycle and Operating Cycle for the firm. Explain your findings.
3. Is the firm's growth rate contributing to the problem? Explain.
4. Assume the firm wants to correct it's cash problem and maintain a cash balance of 8.0% of Sales. List at least three concrete and economically feasible steps the firm could take (either by themselves or in combination) to achieve this goal.
Ans.1. The cash balance in the forecast is continuously falling. From 120.1 in 2002 to 9.4 in 2006. There may be following implications:
(i) Failure to match current ratio requirements
(ii) Liquidity crunch in business
Ans.2. The firm is having such a problem with its cash account because of following possible reasons:
(i) Acquiring assets
(ii) Payment to liabilities
(iii) Distribution of Dividends
Ans.3. Yes. The firm's growth rate contributing to the problem as all the cash generated are getting reinvested into the business.
Ans.4. The firm wants to correct it's cash problem and maintain a cash balance of 8.0% of Sales. Three concrete and economically feasible steps the firm could take are as follows:
(i) Conduct Customer Credit Checks
(ii) Improve Your Inventory
(iii) Lease, Don’t Buy
(iv) Use High-Interest Savings Accounts
Instructions: Complete the 2006 forecast using the assumptions below. If a line does not have an...
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