Bob needs help making a decision on the companys working capital policy. He has sent you a memo Memo from Bob Here is an example for the Working Capital Policy Project Assumptions: Debt Equity Ratio: 1.00 Interest: Short-Term Debt 6%, Long-Term Debt 8% Tax Rate: 50% Conservative Moderate Aggressive Current Assets $61,000 $50,000 $38,000 Fixed Assets $50,000 $50,000 $50,000 Total Assets $111,000 $100,000 $88,000 Current Assets $61,000 $50,000 $38,000 Fixed Assets $50,000 $50,000 $50,000 Total Assets $111,000 $100,000 $88,000 Current Liabilities (6% Interest) $0 $25,000 $44,000 Long-Term Debt (8% Interest) $55,500 $25,000 $0 Equity (Debt Equity Ratio = 1.00) $55,500 $50,000 $44,000 Total Liabilities and Equity $111,000 $100,000 $88,000 Sales $100,000 $100,000 $100,000 EBIT $15,000 $15,000 $15,000 Interest $4,440 $3,500 $2,640 Taxable Income $10,600 $11,500 $12,360 Income Tax at 50% Tax Rate To be calculated To be calculated To be calculated Earnings to Common Stockholders To be calculated To be calculated To be calculated Return on Assets (EBIT/Assets) To be calculated To be calculated To be calculated Return on Equity (Earnings to Common/Common Equity) To be calculated To be calculated To be calculated Perceived Risk Discuss Discuss Discuss Deliverables 1. Please complete the calculations. 2. Characterize the working capital policies as conservative, moderate, or aggressive. 3. Summarize the main risks and rewards of each approach in a report me. . This activity is worth 50 points. The additional criteria used to evaluate this assignment are: 60% for accurate and complete calculations. 10% for correctly characterizing the working capital policies. 30% for identifying and clearly describing the main risks and rewards of each specific approach to working policy. W2 Activity: ACTUAL YEAR Year 1 Year 2 Year 3 Assets Current assets Historical Ratios Cash 2,460,000 2,595,300 Cost to sales 70.00% Accounts receivable 9,750,000 Depreciation to net plant and equipment 5.43% Inventory 5,250,000 Cash to sales 4.92% Total current assets 17,460,000 Accounts receivable to sales 19.50% Inventory to sales 10.50% PPE Equipment to sales 35.00% Equipment 17,500,000 Property and plant to sales 29.50% Property and plant 14,750,000 Accounts payable to sales 6.00% Total pp&e 32,250,000 Accruals to sales 7.50% SG&A to sales 11.70% Total assets 49,710,000 Dividend payout ratio 50% Liabilities Current liabilities Sales Growth 5.50% Accounts payable 3,000,000 Interest on bank loan Constant Accruals 3,750,000 interest on long-term debt Constant Total current liabilities 6,750,000 Long-term debt Bank loan 5,000,000 5,000,000 5,000,000 5,000,000 CONSTANT Long-term bond 7,000,000 7,000,000 7,000,000 7,000,000 CONSTANT Total long-term debt 12,000,000 12,000,000 12,000,000 12,000,000 ` Equity Common stock 9,587,500 9,587,500 9,587,500 9,587,500 CONSTANT Retained earnings 21,372,500 Total equity 30,960,000 9,587,500 9,587,500 9,587,500 Total liabilities & equity 49,710,000 21,587,500 21,587,500 21,587,500 Additional funds needed (AFN) Sales 50,000,000 52,750,000 55,651,250 58,712,069 Cost of goods sold 35,000,000 Gross profit 15,000,000 Selling, general & admin 5,850,000 Depreciation 1,750,000 Earnings before interest & taxes 7,400,000 Interest 975,000 975,000 975,000 975,000 CONSTANT Earnings before taxes 6,425,000 Income tax @ 40% 2,570,000 Net Income 3,855,000 Shares outstanding 1,000,000 1,000,000 1,000,000 1,000,001 Earnings per share 3.86 Dividends paid 1,927,500 Increase in retained earnings 1,927,500 FORECASTING: Activity: Forecasting You receive an email from Bob saying: I need you to do some forecasting for me so I can make a decision on planning for the future. You know that the company will keep our level of debt constant for at least three years of the forecast. You also probably know that the management team wants to maintain the same level of the main ratios as achieved in previous years (please see cells O12 through P30 in Excel spreadsheet). Please forecast the companys income statement and the balance sheet for the next three years, including calculation of the AFN. Youll deal with replenishing the needed funds later. Use the most up-to-date data in the Forecast spreadsheet. Let me know when you can get this to me. Deliverables 1. Please complete the forecast for three years of the income statement and the balance sheet, using the spreadsheet. 2. Calculate the amount of additional funds needed for each of the three years