Question: Start with the partial model in the file IFM9 Ch09 P10 Build a Model.xls from the ThomsonNOW Web site. Cumberland Industries' financial planners must forecast the company's financial results for the coming year. The forecast will be based on the percent of sales method, and any additional funds needed will be obtained by using a mix of notes payable, long-term debt, and common stock. No preferred stock will be issued. Data for the problem, including Cumberland Industries' balance sheet and income statement, can be found in the spreadsheet problem for Chapter 7. Use these data to answer the following questions.
a. Cumberland Industries has had the following sales since 2001. Assuming the historical trend continues, what will sales be in 2007?
Base your forecast on a spreadsheet regression analysis of the 2001-2006 sales. By what percentage are sales predicted to increase in 2007 over 2006? Is the sales growth rate increasing or decreasing?
b. Cumberland's management believes that the firm will actually experience a 20 percent increase in sales during 2007. Construct the 2007 pro forma financial statements. Cumberland will not issue any new stock or long-term bonds. Assume Cumberland will carry forward its current amounts of shortterm investments and notes payable, prior to calculating AFN. Assume that any additional funds needed (AFN) will be raised as notes payable (if AFN is negative, Cumberland will purchase additional short-term investments). Use an interest rate of 9 percent for short-term debt (and for the interest income on short-term investments) and a rate of 11 percent for long-term debt. No interest is earned on cash. Use the beginning of year debt balances to calculate net interest expense. Assume dividends grow at an 8 percent rate.
c. Now create a graph that shows the sensitivity of AFN to the sales growth rate. To make this graph, compare the AFN at sales growth rates of 5, 10, 15, 20, 25, and 30 percent.
d. Calculate net operating working capital (NOWC), total operating capital, NOPAT, and operating cash flow (OCF) for 2006 and 2007. Also, calculate the free cash flow (FCF) for 2007.
e. Suppose Cumberland can reduce its inventory to sales ratio to 5 percent and its cost to sales ratio to 83 percent. What happens to AFN and FCF?