Bob needs help making a decision on the company's working capital policy. He has sent you a memo
Memo from Bob
Here is an example for the Working Capital Policy Project
Assumptions:
• Debt Equity Ratio: 1.00
• Interest: Short-Term Debt 6%, Long-Term Debt 8%
• Tax Rate: 50%
Conservative Moderate Aggressive
Current Assets $61,000 $50,000 $38,000
Fixed Assets $50,000 $50,000 $50,000
Total Assets $111,000 $100,000 $88,000
Current Assets $61,000 $50,000 $38,000
Fixed Assets $50,000 $50,000 $50,000
Total Assets $111,000 $100,000 $88,000
Current Liabilities (6% Interest) $0 $25,000 $44,000
Long-Term Debt (8% Interest) $55,500 $25,000 $0
Equity
(Debt Equity Ratio = 1.00) $55,500 $50,000 $44,000
Total Liabilities and Equity $111,000 $100,000 $88,000
Sales $100,000 $100,000 $100,000
EBIT $15,000 $15,000 $15,000
Interest $4,440 $3,500 $2,640
Taxable Income $10,600 $11,500 $12,360
Income Tax at 50% Tax Rate To be calculated To be calculated To be calculated
Earnings to Common Stockholders To be calculated To be calculated To be calculated
Return on Assets (EBIT/Assets) To be calculated To be calculated To be calculated
Return on Equity (Earnings to Common/Common Equity) To be calculated To be calculated To be calculated
Perceived Risk Discuss Discuss Discuss

Deliverables
1. Please complete the calculations.
2. Characterize the working capital policies as conservative, moderate, or aggressive.
3. Summarize the main risks and rewards of each approach in a report me.
.
This activity is worth 50 points. The additional criteria used to evaluate this assignment are:
• 60% for accurate and complete calculations.
• 10% for correctly characterizing the working capital policies.
• 30% for identifying and clearly describing the main risks and rewards of each specific approach to working policy.

W2 Activity: 

ACTUAL YEAR
Year 1 Year 2 Year 3
Assets
Current assets Historical 

Ratios
Cash 2,460,000 2,595,300 

Cost to sales 70.00%
Accounts receivable 9,750,000 

Depreciation to net plant and equipment 5.43%
Inventory 5,250,000 

Cash to sales 4.92%
Total current assets 17,460,000 

Accounts receivable to sales 19.50%
Inventory to 

sales 10.50%
PPE Equipment to 

sales 35.00%
Equipment 17,500,000 

Property and plant to sales 29.50%
Property and plant 14,750,000 

Accounts payable to sales 6.00%
Total pp&e 32,250,000 

Accruals to sales 7.50%
SG&A to sales 

11.70%
Total assets 49,710,000 

Dividend payout ratio 50%

Liabilities
Current liabilities 

Sales Growth 5.50%
Accounts payable 3,000,000
Interest on 

bank loan Constant
Accruals 3,750,000 

interest on long-term debt Constant
Total current liabilities 6,750,000 

Long-term debt
Bank loan 5,000,000 5,000,000 5,000,000 5,000,000 

CONSTANT
Long-term bond 7,000,000 7,000,000 7,000,000 7,000,000 

CONSTANT
Total long-term debt 12,000,000 12,000,000 12,000,000 12,000,000 

'
Equity
Common stock 9,587,500 9,587,500 9,587,500 9,587,500 

CONSTANT
Retained earnings 21,372,500
Total equity 30,960,000 9,587,500 9,587,500 9,587,500 

Total liabilities & equity 49,710,000 21,587,500 21,587,500 21,587,500 

Additional funds needed (AFN) - 

Sales 50,000,000 52,750,000 55,651,250 58,712,069 

Cost of goods sold 35,000,000
Gross profit 15,000,000
Selling, general & admin 5,850,000 

Depreciation 1,750,000 

Earnings before interest & taxes 7,400,000 

Interest 975,000 975,000 975,000 975,000 

CONSTANT
Earnings before taxes 6,425,000 

Income tax @ 40% 2,570,000
Net Income 3,855,000
Shares outstanding 1,000,000 1,000,000 1,000,000 1,000,001 

Earnings per share 3.86 - - -
Dividends paid 1,927,500 - - - 

Increase in retained earnings 1,927,500 - - -
FORECASTING:
Activity: Forecasting
You receive an email from Bob saying:

I need you to do some forecasting for me so I can make a decision on planning for the future. You know that the company will 

keep our level of debt constant for at least three years of the forecast. You also probably know that the management team 

wants to maintain the same level of the main ratios as achieved in previous years (please see cells O12 through P30 in Excel 

spreadsheet).

Please forecast the company's income statement and the balance sheet for the next three years, including calculation of the 

AFN. You'll deal with replenishing the needed funds later. 

Use the most up-to-date data in the Forecast spreadsheet. Let me know when you can get this to me.

Deliverables
1. Please complete the forecast for three years of the income statement and the balance sheet, using the spreadsheet.
2. Calculate the amount of additional funds needed for each of the three years.