A. HOL Ltd. is preparing a financial forecast for 2020. HOL's 2019 sales were $36 million, and the marketing department is forecasting a 25% increase for 2020. The company was operating at full capacity in 2019. The 2019 financial statements, plus some other data, are shown below. A.2019 Balance Sheet (Thousands of Dollars) Cash and securities $1,800 Accounts receivable 10,800 Inventories 12,600 Total current assets 25,200 Accounts payable and accruals Notes payable Accruals Total current liabilities $7,200 3,472 2,520 13,192 5,000 2,000 26,608 $46,800 Long-term debt Net fixed assets 21,600 Common stock Retained earnings Total liabilities and equity Total assets $46,800 B. 2019 Income Statement (Thousands of Dollar's) Sales $36,000 30,783 5,217 717 4,500 Operating Costs Earnings before interest and taxes Interest Earnings before taxes Taxes (28%) Net income Dividends (60%) Addition to retained earnings 1,260 3,240 1,944 $1,296 C. Key Ratios HOL Industry 8.7% 9.5% Profit margin Return on equity 12.5% 15.6% Debt/ assets 18.5% 20.0% Current ratio 1.9x 2.5x Assume (1) that HOL was operating at full capacity in 2019 with respect to all assets, except fixed assets, fixed assets in 2019 were being utilized at only 75% of capacity (2) that all assets grow proportionally with sales, (3) that accounts payable and accruals will also grow in proportion to sales, and (4) that the 2019 profit margin and dividend payout will be maintained. 1. Using the AFN equation, what will be the company's financial requirements for the coming year? 2. HOL is operating with excess capacity with regard to fixed assets at only 75% of capacity. What level of sales could exist in 2020 without needing to add additional fixed assets? 3. Using the Forecast Financial Statements approach, estimate the 2020 financial requirements. Assume (1) that each type of asset, as well as payables, accruals and fixed and variable costs, will be the same percentage of sales in 2020 as in 2019; (2) that the dividend payout ratio is held constant at 60%; (3) that external funds needed are financed 100% by notes payable (no new common stock will be issued); (4) that all debt carries an adjusted interest rate of 12%; and (5) that interest expenses should be based on the balance of debt at the beginning of the year. 4. Based on the Forecasted Financial Statements calculate HOL's forecasted ratios, and compare them with the company's 2019 ratios and with the industry averages. a. How effectively is the company managing its profitability, debt and current assets? b. Suppose HOL were able to bring the Accounts Receivable and Inventory levels down to 28% and 33% of Sales and reduce its Operating Costs ratio to 84.5%. What effect would this have on its AFN? A. HOL Ltd. is preparing a financial forecast for 2020. HOL's 2019 sales were $36 million, and the marketing department is forecasting a 25% increase for 2020. The company was operating at full capacity in 2019. The 2019 financial statements, plus some other data, are shown below. A.2019 Balance Sheet (Thousands of Dollars) Cash and securities $1,800 Accounts receivable 10,800 Inventories 12,600 Total current assets 25,200 Accounts payable and accruals Notes payable Accruals Total current liabilities $7,200 3,472 2,520 13,192 5,000 2,000 26,608 $46,800 Long-term debt Net fixed assets 21,600 Common stock Retained earnings Total liabilities and equity Total assets $46,800 B. 2019 Income Statement (Thousands of Dollar's) Sales $36,000 30,783 5,217 717 4,500 Operating Costs Earnings before interest and taxes Interest Earnings before taxes Taxes (28%) Net income Dividends (60%) Addition to retained earnings 1,260 3,240 1,944 $1,296 C. Key Ratios HOL Industry 8.7% 9.5% Profit margin Return on equity 12.5% 15.6% Debt/ assets 18.5% 20.0% Current ratio 1.9x 2.5x Assume (1) that HOL was operating at full capacity in 2019 with respect to all assets, except fixed assets, fixed assets in 2019 were being utilized at only 75% of capacity (2) that all assets grow proportionally with sales, (3) that accounts payable and accruals will also grow in proportion to sales, and (4) that the 2019 profit margin and dividend payout will be maintained. 1. Using the AFN equation, what will be the company's financial requirements for the coming year? 2. HOL is operating with excess capacity with regard to fixed assets at only 75% of capacity. What level of sales could exist in 2020 without needing to add additional fixed assets? 3. Using the Forecast Financial Statements approach, estimate the 2020 financial requirements. Assume (1) that each type of asset, as well as payables, accruals and fixed and variable costs, will be the same percentage of sales in 2020 as in 2019; (2) that the dividend payout ratio is held constant at 60%; (3) that external funds needed are financed 100% by notes payable (no new common stock will be issued); (4) that all debt carries an adjusted interest rate of 12%; and (5) that interest expenses should be based on the balance of debt at the beginning of the year. 4. Based on the Forecasted Financial Statements calculate HOL's forecasted ratios, and compare them with the company's 2019 ratios and with the industry averages. a. How effectively is the company managing its profitability, debt and current assets? b. Suppose HOL were able to bring the Accounts Receivable and Inventory levels down to 28% and 33% of Sales and reduce its Operating Costs ratio to 84.5%. What effect would this have on its AFN