Question 3:

a.J and S Corporation is evaluating its financing requirements for the coming year. The firm has only been in business for 1 year, but its CFO predicts that the firm's operating expenses, current assets, net fixed assets, and current liabilities will remain at their current proportion of sales.

Last year J and S Corp. had $15 million in sales with net income of $1.5 million. The firm anticipates that next year's sales will reach $18 million with net income rising to $3 million. Given its present high rate of growth, the firm retains all its earnings to help defray the cost of new investments.

The firm's balance sheet for the year just ended is found below:

J and S Corporation

Balance Sheet

12/31/2000

% of Sales

Current assets

$6,000,000

40%

Net fixed assets

9,000,000

60%

Total

$15,000,000

Liabilities and Owners' Equity

Accounts payable

$3,750,000

25%

Long-term debt

4,250,000

NA^a

Total liabilities

$8,000,000

Common stock

2,000,000

NA

Paid-in capital

2,800,000

NA

Retained earnings

2,200,000

Common equity

7,000,000

Total

$15,000,000

^aNot applicable. This figure does not vary directly with sales and is assumed to remain constant for purposes of making next year's forecast of financing requirements.

Estimate J and S corp. total financing requirements (i.e., total assets) for 2001 and its net funding requirements (DFN).

Give a brief summary of forecasting to determine additional (discretionary) funding (financing) needed.