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.

e. Initially, some NWC managers questioned whether the new facility expansion was necessary, especially as it results in increasing net fixed assets from $500 million to $700 million (a 40% increase). However, after extensive discussions about NWC needing to position itself for future growth and being flexible and competitive in todays marketplace, NWCs top managers agreed that the expansion was necessary. Among the issues raised by opponents was that NWCs fixed assets were being operated at only 85% of capacity. Assuming that its fixed assets were operating at only 85% of capacity, by how much could sales have increased, both in dollar terms and in percentage terms, before NWC reached full capacity?

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%