A. OCL Ltd. is preparing a financial forecast for 2020. OCL's 2019 sales were $2 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) Percent of Sales Percent of Sales 20 5% 1% 12% Cash and securities $ Accounts receivable Inventories Total current assets Net fixed assets 12% 240 240 500 500 Accounts payable and accruals $ 100 Notes payable 100 Total current liabilities 200 Long-term debt 100 Common stock 500 Retained earnings 200 Total liabilities and equity $1,000 25% Total assets $1,000 B. 2019 Income Statement (Thousands of Dollar's) Percent of Sales $2,000.00 1,200.00 60% 700.00 35% Sales Cost of goods sold (COGS) Sales, general, and administrative costs (SGA) Earnings before interest and taxes Interest Earnings before taxes Taxes (40%) Net income Dividends (40%) Addition to retained earnings 100.00 10.00 90.00 36.00 $54.00 21.60 $32.40 Finance 311 Assignment #1 C. Key Ratios OCL Industry 2.7096 Profit margin Return on equity Days sales outstanding (365 days) Inventory turnover Fixed assets turnover Debt/assets Times interest earned Current ratio 7.7196 43.80 days 8.33 x 4.00 x 20.00% 10.00X 2.50 x 4.0096 15.6096 32.00 days 11.00X 5.00x 26.0096 9.40X 3.00x Aegume (1) that OCL was operating at full capacity in 2019 with respect to all assets, (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. 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 40% (3) that external funds needed are financed 50% by notes payable and 50% by long-term debt (no new common stock will be issued); (4) that all debt carries an adjusted interest rate of 10%; and (5) that interest expenses should be based on the balance of debt at the beginning of the year, 3. Based on the Forecasted Financial Statements calculate OCL'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 inventory and accounts receivable? b. Suppose OCL were able to bring the inventory levels and Accounts Receivable in line with the industry averages based on the Inventory Tumover and DSO ratios and also reduce its Sales, General and Administrative Sales ratio to 33%. What effect would this have on its AFN? 4. Suppose OCL operated with excess capacity with regard to fixed assets. Specifically, fixed assets were operated at only 75% of capacity. (1) What level of sales could have existed in 2019 without needing to add additional fixed assets? (2) What adjustment would be made to Additional Funds Needs in 2020 to account for the excess capacity in fixed assets? A. OCL Ltd. is preparing a financial forecast for 2020. OCL's 2019 sales were $2 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) Percent of Sales Percent of Sales 20 5% 1% 12% Cash and securities $ Accounts receivable Inventories Total current assets Net fixed assets 12% 240 240 500 500 Accounts payable and accruals $ 100 Notes payable 100 Total current liabilities 200 Long-term debt 100 Common stock 500 Retained earnings 200 Total liabilities and equity $1,000 25% Total assets $1,000 B. 2019 Income Statement (Thousands of Dollar's) Percent of Sales $2,000.00 1,200.00 60% 700.00 35% Sales Cost of goods sold (COGS) Sales, general, and administrative costs (SGA) Earnings before interest and taxes Interest Earnings before taxes Taxes (40%) Net income Dividends (40%) Addition to retained earnings 100.00 10.00 90.00 36.00 $54.00 21.60 $32.40 Finance 311 Assignment #1 C. Key Ratios OCL Industry 2.7096 Profit margin Return on equity Days sales outstanding (365 days) Inventory turnover Fixed assets turnover Debt/assets Times interest earned Current ratio 7.7196 43.80 days 8.33 x 4.00 x 20.00% 10.00X 2.50 x 4.0096 15.6096 32.00 days 11.00X 5.00x 26.0096 9.40X 3.00x Aegume (1) that OCL was operating at full capacity in 2019 with respect to all assets, (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. 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 40% (3) that external funds needed are financed 50% by notes payable and 50% by long-term debt (no new common stock will be issued); (4) that all debt carries an adjusted interest rate of 10%; and (5) that interest expenses should be based on the balance of debt at the beginning of the year, 3. Based on the Forecasted Financial Statements calculate OCL'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 inventory and accounts receivable? b. Suppose OCL were able to bring the inventory levels and Accounts Receivable in line with the industry averages based on the Inventory Tumover and DSO ratios and also reduce its Sales, General and Administrative Sales ratio to 33%. What effect would this have on its AFN? 4. Suppose OCL operated with excess capacity with regard to fixed assets. Specifically, fixed assets were operated at only 75% of capacity. (1) What level of sales could have existed in 2019 without needing to add additional fixed assets? (2) What adjustment would be made to Additional Funds Needs in 2020 to account for the excess capacity in fixed assets