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You have been appointed as the new Chief Financial Officer of ABC Aluminum, a Jebel Ali manufacturer of specialized aluminum foils. You are responsible for

You have been appointed as the new Chief Financial Officer of ABC Aluminum, a Jebel Ali manufacturer of specialized aluminum foils. You are responsible for constructing financial forecasts and for evaluating the financial feasibility of new projects.

You must prepare a financial forecast for 2021, ABCs 2020 sales were AED 891,600/- and the marketing department is forecasting a 20% increase for 2021. The company was operating at full capacity in 2020. The 2020 financial statements, plus some other data, are given below:

Income Statement as of 31/12/2020 (AED)

Sales

891,600

COGS

(693,600)

Gross Profit

198,000

SG&A Expenses

(18,240)

Earnings before interest and taxes

179,760

Interest paid

(13,400)

Taxable Income

166,360

Taxes

(58,226)

Net Income

108,134

Dividends

35,684

Addition to Retained Earnings

72,450

Balance Sheet as of 31/12/2020 (AED)

Current Assets

Current Liabilities

Cash

24,280

Accounts Payable

65,200

Accounts Receivable

37,070

Notes Payable

16,320

Inventory

83,400

Total Current Assets

144,750

Total Current Liabilities

81,520

Fixed Assets

Long-term Liabilities

Net Plant and Equipment

396,500

Long-term Debt

155,000

Owner's Equity

Common Stock

130,000

Retained Earnings

174,730

Total Owners Equity

304,730

Total Assets

541,250

Total Liabilities and Owner's Equity

541,250

  • Sales for 2021 are projected to grow by 20 percent.
  • Interest expense will remain constant
  • Tax rate and the dividend payout rate will also remain constant.

  1. Question 1 (15 points): If the firm is operating at full capacity and no new debt or equity is issued;
    1. (5 points) Estimate the 2021 financial requirement using the projected financial statement approach.
    2. (5 points) What external financing is needed to support the 20 percent growth rate in sales?
    3. (5 points) Suppose the firm was operating at 80 percent capacity in 2020. How much additional sales can the company support without having to add fixed assets?

  1. (5 points) Knowing that you are the firms new CFO, what current asset investment policy would you adopt? Explain.
  2. (5 points) Suppose you are forecasting the cash budget, why would you want to maintain a relatively high amount of cash?

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