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CASE 32 FULTEX 209 12. (a) A number of Fultex's top executives compiled the following worst-case scenario. Sales Opera ting margin NWC/sa1es DPS Capital

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CASE 32 FULTEX 209 12. (a) A number of Fultex's top executives compiled the following worst-case scenario. Sales Opera ting margin NWC/sa1es DPS Capital spending 1996 560.1 .125 .10 S 70 1997 588.1 .135 .10 55 998 617.5 .135 .10 1999 648.4 .10 28 Note: DPS is dividend per share, NWC is net working capital. Develop a cash flow forecast assuming the entire $81 million is borrowed. What are the implications of this forecast for the financing decision? (b) When Elizabeth Bethea, the firm's CFO, was shown the above forecast, she thought the operating margin assumption was "too high" and NWC/sales was a "bit optimistic." Redo the forecast assuming (1) a 12 percent operating margin in 1996 and 1997, a 13 percent operating margin in 1998 and 1999, and (2) NWC/sales is .24 each year. (c) Assuming the same operating margin each year, how low can operating margin go before the cumulative cash flow in 1999 becomes zero? Use all the other assumptions in part (a). What is the implication of your answer for the financing choice? (You may want to consult Exhibit 2.)

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