Felicia & Fred’s executive team has noted the customer feedback regarding the holiday purse offering and has decided to expand its product line into handbags as well. Since manufacturing expertise and equipment within the company at this point is limited, the company intends to outsource the manufacturing process to a Taiwanese production facility.

As Felicia & Fred’s newest design team member has had significant experience in this industry and is familiar with quality assurance initiatives, the plan requires expansion of facilities to store inventory. Much of their manufacturing process occurs in the United States, and this is one of their key marketing points; however, despite the perceived consumer enthusiasm for the new product, the company is skeptical of success.

To fund the inevitable increase in working capital, Felicia & Fred would like to resort to the maximum amount available under its internal growth rate and sustainable growth rate, as it believes that limiting investment at this point will also limit risk.

Question 1

Define the internal growth rate and the sustainable growth rate. What considerations emerge as Felicia & Fred limit themselves to the amount of capital sourced from an internal perspective?

Question 2

Within the scope of short term financial planning for the firm Felicia and Fred a maintain cash budgets. What is this? How is it useful to them? And what are some of the considerations relative to the project under consideration?

Question 3

After consideration of this new project Felicia and Fred feel that adopting an aggressive financing policy may be appropriate. What does this mean?   Also what are some of the potential the risks and rewards of such a policy? And do you believe this is the most fitting policy for the firm?