Tiny Children Inc. (TCI) is a manufacturer of childrens wear. The company has two manufacturing plants. TCI has had significant cash flow problems for the past two years and further declines are expected. As a first step in managing this financial crisis, the CFO wants to calculate the cash flow needs of the company for next year, Year 3. Once the cash deficit has been determined, next steps can be taken. Below is information that has been forecasted for Year 3:

Sales $6,430,000 Operating expenses 4,210,000 Depreciation 680,000 Interest payments 300,000 Loan principal payments 1,400,000 Dividends 500,000

Opening and closing balances

Year 3 Year 2

Accounts receivable $616,000 $794,000

Inventories 420,000 509,000

Accounts payable 690,000 750,000

PP&E closing balance 7,242,000 6,842,000

The company pays income taxes at 15% and has loss carryforwards that total $5,600,000 which do not start to expire for 17 years.

Required: a) Calculate the unlevered free cash flow that TCI will generate in Year 3. Highlight any assumptions that you have made.

b) How much in additional funds does TCI require? Discuss at least three possible options it has to improve cash flows.