Tulley Appliance Inc. projects next year’s sales to be $20 million. Current sales are 15 million, based on current assets of $5 million and fixed assets of $5 million. The firm’s net profit margin is 5 percent after taxes. Tulley forcasts that its current assets will rise in direct proportion to increase in sales, but that its fixed assets will increase by only $100,000. Currently, Tulley has 1.5 million in accounts payable (which vary directly with sales), $2 million in long term debt (due in 10 years), and common equity (including $4 million in retained earnings) totaling $6.5 million. Tulley plans to pay $500,000 in common stock dividends next year.
A.) What are Tulley’s total financing needs (i.e., total assets) for the coming year?
B.) Given the firm’s projections and dividend payments plans, what are its discretionary financing needs?
C.) Based on you projections, and assuming that the 100,000 expansion in fixed assets will occur, what is the largest increase in sales the firm can support without having to resort to use of discretionary sources of financing?
(Cost of Accounts receivable) Johnson Enterprises Inc. is involved in the manufacture and sale of electronic components used in small AM/FM radios. The firm needs #300,000 to finance an anticipated expansion in receivables due to increased sales. Johnson’s credit terms are net 60, and its average monthly credit sales are $200,000. In gereral, the firm’s customers pay within the credit period: thus, the firm’s average accounts receivable balance is $400,000. Chuck Idol, Johnson’s comtroller, approached the firm’s bank with a request for a loan for the $300,000 using the firm’s accounts receivable as collateral. The bank offered to makea loan at a rate of 2percent over prime plus a 1 percent processing charge on all receivable pledge($200,000 per month). Futhermore, the bank agreed to lend up to 75 percent of the fce value of the receivables pledged.
A.) Estimate the cost of the receivables loan to Johnson when the firm borrows the $300,000. The prime rate is currently 11 percent.
B.) Idol also requested a line of creditfor $300,000 from the bank. The bank agreed to grant the necessary line of credit at a rate of 3 percent over prime and required a 15 percent compensating balance. Johnson currently maintains an average demand deposit of $80,000. Estimate the cost of the line of credit to Johnson.
C.) Which source of credit should Johnson select? Why?