Financial Forecasting For Small Motors Inc. Currently Open

Financial Forecastingsmall Motors Inc Which Is Currently Operating A

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 percent 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 percent 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

Financial forecasting is a vital process for firms to ensure capital adequacy, plan for future growth, and understand their financial position under various scenarios. Key to this process involves projecting future assets, liabilities, and equity based on anticipated sales growth. Small Motors Inc, as a company operating at full capacity without long-term debt, provides a straightforward case for such forecasting, especially given its stable profit margin and no dividend payout policy.

Firstly, the projected assets for the upcoming year can be calculated by recognizing that all assets, both current and fixed, vary directly with sales. Currently, current assets amount to $1,600, and net fixed assets total $27,500, summing to total assets of $29,100. Since sales are expected to increase by 5.5%, projected sales will be:

Projected Sales = Current Sales x (1 + Growth Rate) = $29,000 x 1.055 = $30,595

Correspondingly, total projected assets would be:

Projected Assets = Current Total Assets x (1 + Growth Rate) = $29,100 x 1.055 ≈ $30,704.50

Next, current liabilities, which also vary directly with sales, amount to $1,200, so projected liabilities would be:

Projected Liabilities = Current Liabilities x (1 + Growth Rate) = $1,200 x 1.055 = $1,266

To determine current equity, we use the accounting equation:

Assets = Liabilities + Equity

Given current assets of $29,100 and liabilities of $1,200, current equity totals:

Current Equity = $29,100 - $1,200 = $27,900

Now, to find the projected increase in retained earnings, consider the firm's profit margin of 5%. The projected net income for next year based on projected sales will be:

Projected Net Income = Projected Sales x Profit Margin = $30,595 x 0.05 ≈ $1,529.75

Since the company does not pay dividends, all net income is retained earnings, leading to a projected increase in retained earnings of approximately $1,530.

Finally, the additional financing required (AFN) for the upcoming year can be computed using the formula:

Additional Financing Needed = Projected Assets - Projected Liabilities - Current Equity - Projected Increase in Retained Earnings

Plugging in the known values:

AFN = $30,704.50 - $1,266 - $27,900 - $1,530 ≈ $8

Thus, Small Motors Inc will require about $8 in additional equity financing to support its projected growth without external debt, ensuring it sustains its full capacity operation and maintains financial stability.

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