The management of Hearth and Home provides you with the following projections of net sales (in 000s) for the next three years: 20Y4 - $3,750; 20Y5 - $4,250; 20Y6 - $4,650. How would you characterize the assumptions used in making these projections?

Conservative projected sales growth is below historical levels Plausible projected sales growth is at or near historical levels Plausible projected sales growth can be achieved with new strategies Aggressive projected sales growth is significantly above historical levels

Hearth and Home Part B

Hearth and Home Balance Sheets (in $000s) As At June 30:

20Y3 20Y2 20Y1 ASSETS Current assets

Cash $ 66 $ 123 $ 100 Accounts receivable 376 303 240 Inventory 547 461 417 Other current assets 107 70 117 Total current assets 1,096 957 874

Fixed assets 313 257 245

Trademarks and goodwill 107 71 71

TOTAL ASSETS $ 1,516 $ 1,285 $ 1,190

LIABILITIES AND OWNERS EQUITY Current liabilities Current portionLTD $ 67 $ 67 $ 67 Notes payable 101 5 0 Accounts payable 244 204 148 Accrued expenses 69 64 57 Other current liabilities 46 28 47 Total current liabilities 527 368 319

Hearth and Home Part A

Company Information Hearth and Home sells, installs, and services residential fireplaces. Formed 22 years ago by Len Wilkinson as a retailer of fireplaces and accessories, the company installed virtually all of the fireplaces it sold and guaranteed its work for 10 years. The company built a reputation for prompt, quality workmanship and gradually, starting six years ago, several of the areas leading contractors began to subcontract chimney and fireplace installation to Hearth and Home. During its early years, most of the companys sales took place from October to March. As it expanded, subcontracting sales occurred throughout the year, though slightly more in the summer months. Sales are now fairly evenly divided between retail and subcontracting. The Wilkinsons have financed the company with long-term debt. The family has provided term loans totaling $350,000, and your organization has provided $200,000 in long-term debt. Your organization also made available to the company what is now a $400,000 revolving credit. H and H may borrow up to 50 percent of receivables outstanding for less than 60 days and up to 40 percent of inventory, excluding inventory work in process. The company must be out of debt for 30 consecutive days during the second quarter of every calendar year. Until the end of 20Y3, the company was a model customer, meeting the second-quarter 30-day clean-up requirement fairly easily in 20Y1 and 20Y2. At the end of fiscal 20Y3, however, the company was unable to clean up the line. In fact, at the end of June, the outstanding balance was $101,000, the company having been unable to reduce the line significantly below $100,000 at any time during the entire second quarter. The balance outstanding on the last day for which you have data was $153,000. John Holmgren is the lender responsible for the relationship, and he has asked you for assistance in deciding how to handle the loan. When the company could not meet the cleanup requirement, John waived the requirement based on the companys past history and performance. In Johns opinion, H and Hs management has such high integrity that your organization will be able to recover its money; he believes that the owners would sell their houses if necessary to repay the debt. Having said that, John is also aware that the owning family depends upon dividend income and considers an annual dividend of at least $80,000 to be mandatory. John is feeling the dissatisfaction of credit management, which is unhappy with his decision to waive the clean-up. He needs to come up with a solution to the problem that will meet both the companys and your organizations needs. As you and John discuss the situation, he tells you that H and Hs management expects sales to increase significantly in 20Y4 and that part of that increase will be due to additional contracting mainly repairing older installations by a couple of competitors that have since gone out of business. The Wilkinsons have proposed that the limit on the revolving credit be increased to $500,000.

Long-term debt 330 397 464 Other noncurrent liabilities 20 19 18 Owners equity 639 501 389 TOTAL LIABILITIES AND OWNERS EQUITY $ 1,516 $ 1,285 $ 1,190

Working investment $ 610 $ 496 $ 452