FINANCIAL FORECASTING Sue Wilson, the new financial manager of New World Chemicals (NWC), a California producer of specialized chemicals for use in fruit orchards, must prepare a formal financial forecast for 2015. NWC’s 2014 sales were $2 billion, and the marketing department is forecasting a 25%

increase for 2015. Wilson thinks the company was operating at full capacity in 2014, but she is not sure.

The first step in her forecast was to assume that key ratios would remain unchanged and that it would be

“business as usual” at NWC. The 2014 financial statements, the 2015 initial forecast, and a ratio analysis for 2014 and the 2015 initial forecast are given in Table IC 16.1.

Assume that you were recently hired as Wilson’s assistant and that your first major task is to help her develop the formal financial forecast. She asks you to begin by answering the following questions.

a. Assume (1) that NWC was operating at full capacity in 2014 with respect to all assets, (2) that all assets must grow at the same rate as sales, (3) that accounts payable and accrued liabilities also will grow at the same rate as sales, and (4) that the 2014 profit margin and dividend payout will be maintained. Under those conditions, what would the AFN equation predict the company’s financial requirements to be for the coming year?

b. Consultations with several key managers within NWC, including production, inventory, and receivable managers, have yielded some very useful information.AppendixLO1