Q1. Mr William, the new financial manager of Alpha Chemicals (AC), a California producer of specialized chemicals for use in fruit orchards, must prepare a formal financial forecast for 2019. Mr Willliam thinks the company was operating at full capacity in 2018, but he is not sure about this. The first step in his forecast was to assume that key ratios would remain unchanged and that it would be business as usual at AC. The 2018 financial statements are given below.

Alpha Chemicals

Balance sheet

As on December 31, 2018

Cash 25,000 Accounts Payable 10,000

Accounts receivable 3,000 Notes Payable 3,000

Inventory 22,000 other accruals 5,000

Current assets 50,000 Current Liabilities 18,000

Long Term Debts 35,000

Net Plant and Equipment 69,000 Common Stocks 40,000

Retained Earnings 26,000

Total Assets 119,000 Total Liabilities and Equity 119,000

Alpha Chemicals

Income Statement

For the Years Ended December 31, 2018

Net sales 1,072,000

CGS 921,000

Gross Profit 151,000

Selling &General & Admin Expense 86,000

General & Admin Expense 32,000

Operating Profit 33,000

Interest Expense 5,000

Profit before taxes 28,000

Taxes (40%) 11,200

Net Income 16,800

Dividend 7,560

1. Now assume that the company was operating at 75% capacity in 2018, What would be the external funding requirement if the sales is projected to increase by 25%? (04)
2. Suppose 2019 sales are projected to increase by 25% over 2018 sales. Use percent of sales method to forecast a balance sheet and income statement for December 31, 2019. The interest rate on all debt is 10%, Assume that all additional debt in the form of notes payable is added at the end of the year, which means that you should base the forecasted interest expense on the balance of debt at the beginning of the year. Assume that the company was operating at full capacity in 2018, that it cannot sell off any of its fixed assets, and that any required financing will be borrowed as notes payable. Determine the additional funds needed.