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 2022. NWCs 2021 sales were $2 billion, and the marketing department is forecasting a 25% increase for 2022. Wilson thinks the company was operating at full capacity in 2021, 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 2021 financial statements, the 2022 initial forecast, and a ratio analysis for 2021 and the 2022 initial forecast are given in Table IC 17.1. Assume the firms cost of goods sold is 50% of sales.

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

1. NWCs high DSO is largely due to one significant customer who battled through some hardships the past 2 years but who appears to be financially healthy again and is generating strong cash flow. As a result, NWCs accounts receivable manager expects the firm to lower receivables enough for a calculated DSO of 34 days without adversely affecting sales.

2. NWC was operating slightly below capacity, but its forecasted growth will require a new facility, which is expected to increase NWCs net fixed assets to $700 million.

3. A relatively new inventory management system (installed last year) has taken some time to catch on and to operate efficiently. NWCs inventory turnover improved slightly last year, but this year NWC expects even more improvement as inventories decrease and inventory turnover is expected to rise to 5. Again, assume that its cost of goods sold is 50% of sales.

Incorporate that information into the 2022 initial forecast results, as these adjustments to the initial forecast represent the final forecast for 2022. (Hint: Total assets do not change from the initial forecast.)

Financial Statements and Other Data on NWC (millions of dollars) TABLE IC 17.1

A. Balance Sheets	2021	2022E
Cash and equivalents	$ 20	$ 25
Accounts receivable	240	300
Inventories	240	300
Total current assets	$ 500	$ 625
Net fixed assets	500	625
Total assets	$ 1,000	$ 1,250
Accounts payable and accrued liabilities	$ 100	$ 125
Notes payable	100	190
Total current liabilities	$ 200	$ 315
Long-term debt	100	180
Common stock	500	500
Retained earnings	200	255
Total liabilities and equity	$1,000	$1,250
B. Income Statements	2021	2022E
Sales	$2,000.00	$2,500.00
Variable costs	1,200.00	1,500.00
Fixed costs	700.00	875.00
Earnings before interest and taxes (EBIT)	$ 100.00	$ 125.00
Interest	16.00	20.00
Earnings before taxes (EBT)	$ 84.00	$ 105.00
Taxes (25%)	21.00	26.25
Net income	$ 63.00	$ 78.75
Dividends (30%)	$ 18.90	$ 23.63
Addition to retained earnings	$ 44.10	$ 55.13

C. Key Ratios	NWC (2021)	NWC (2022E)	Industry	Comment
Basic earning power	10.00%	10.00%	20.00%
Profit margin	3.15	3.15	4.00
Return on equity	9.00	10.43	15.60
Days sales outstanding (365 days)	43.80 days	43.80 days	32.00 days
Inventory turnover	4.17	4.17	6.00
Fixed assets turnover	4.00	4.00	5.00
Total assets turnover	2.00	2.00	2.50
Total liabilities/assets	30.00%	39.60%	36.00%
Times interest earned	6.25	6.25	9.40
Current ratio	2.50	1.98	3.00
Payout ratio	30.00%	30.00%	30.00%