Busi 320 Module Week 3 Textbook Assignment 2 Ch 4 Financial

Busi 320moduleweek 3 Textbook Assignment 2 Ch 4 Financial Foreca

Busi 320 module/week 3 Textbook Assignment 2 Chapter 4 Financial Forecasting: Small Motors Inc., which is currently operating at full capacity, has sales of $29,000, current assets of $1,600, current liabilities of $1,200, net fixed assets of $27,500, and a 5% profit margin. The firm has no long-term debt and does not plan on acquiring any. The firm does not pay any dividends. Sales are expected to increase by 5.5% next year. If all assets, short-term liabilities, and costs vary directly with sales, answer the following questions: What is the amount of projected assets? What is the amount of projected liabilities? What is the current equity? What is the projected increase in retained earnings? How much additional equity financing is required for next year?

Paper For Above instruction

The forecasting of financial statements is a critical aspect of strategic planning for businesses, especially those operating at or near full capacity. It aids in understanding future financial needs, determining the adequacy of current resources, and identifying the necessity for additional financing. Small Motors Inc., a hypothetical firm operating at full capacity with current sales of $29,000, provides an illustrative case to explore these concepts. This paper performs a detailed analysis to project the firm's future financial position based on the provided data and assumptions.

Current Financial Position

Initially, the firm's current assets are $1,600, and current liabilities stand at $1,200, leading to a current equity calculation. Equity is derived by subtracting liabilities from assets, so:

\[ \text{Current Equity} = \text{Total Assets} - \text{Total Liabilities} \]

Given that the firm's total assets include current assets and net fixed assets, the total current assets plus fixed assets sum to:

\[ \$1,600 + \$27,500 = \$29,100 \]

Current liabilities amount to \$1,200, so:

\[ \text{Current Equity} = \$29,100 - \$1,200 = \$27,900 \]

Projected Sales and Asset Needs

Next, projecting sales for the following year involves applying the 5.5% expected increase:

\[ \text{Projected Sales} = \$29,000 \times (1 + 0.055) = \$29,000 \times 1.055 = \$30,595 \]

Assuming all assets and liabilities vary directly with sales, the projected total assets are proportional to the sales increase:

\[ \text{Projected Total Assets} = \text{Current Total Assets} \times 1.055 = \$29,100 \times 1.055 = \$30,709.50 \]

Similarly, projected current assets and fixed assets are:

\[ \text{Projected Current Assets} = \$1,600 \times 1.055 = \$1,688 \]

\[ \text{Projected Fixed Assets} = \$27,500 \times 1.055 = \$28,962.50 \]

Projected total liabilities, assuming they also increase proportionally, are:

\[ \text{Projected Liabilities} = \$1,200 \times 1.055 = \$1,266 \]

Projected Equity and Retained Earnings

The projected equity is computed based on projected assets and liabilities:

\[ \text{Projected Equity} = \text{Projected Total Assets} - \text{Projected Liabilities} = \$30,709.50 - \$1,266 = \$29,443.50 \]

The firm's net profit margin is 5%, so projected net income for the next year is:

\[ \text{Net Income} = \text{Projected Sales} \times 0.05 = \$30,595 \times 0.05 = \$1,529.75 \]

Given that the firm does not pay dividends, all net income is retained earnings, hence the projected increase in retained earnings equals this net income:

\[ \text{Increase in Retained Earnings} = \$1,529.75 \]

The change in retained earnings contributes to the increase in equity, but because all assets and liabilities are projected directly with sales, the additional financing required is primarily determined by the difference between projected assets and the sum of projected liabilities and retained earnings.

Additional Financing Needed

Finally, the additional equity financing required can be calculated by:

\[

\text{Additional Financing} = \text{Projected Assets} - \text{Projected Liabilities} - \text{Current Equity} - \text{Projected Increase in Retained Earnings}

\]

Substituting the known values:

\[

\$30,709.50 - \$1,266 - \$27,900 - \$1,529.75 = -\$986.25

\]

Since the result is negative, it implies that the projected retained earnings and current equity are sufficient to finance the projected asset increase. Therefore, no additional external equity financing is needed for the next year.

Conclusion

Through precise calculations based on assumptions of proportionality and fixed profit margin, Small Motors Inc. anticipates a modest increase in assets and liabilities aligned with sales growth. The firm’s retained earnings and current equity adequately support the projected expansion, negating the immediate need for external financing. This analysis underscores the importance of financial forecasting in strategic planning, enabling firms to prepare for growth within their existing financial structure.

References

• Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.
• Ross, S. A., Westerfield, R. W., & Jaffe, J. (2019). Corporate Finance. McGraw-Hill Education.
• Brealey, R. A., Myers, S. C., & Allen, F. (2019). Principles of Corporate Finance. McGraw-Hill Education.
• Higgins, R. C. (2012). Analysis for Financial Management. McGraw-Hill Education.
• Van Horne, J. C., & Wachowicz, J. M. (2005). Fundamentals of Financial Management. Pearson Education.
• Gitman, L. J., & Zutter, C. J. (2015). Principles of Managerial Finance. Pearson Education.
• Penman, S. H. (2012). Financial Statement Analysis and Security Valuation. McGraw-Hill Education.
• Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Wiley.
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