10 May WHAT LIMITATIONS DOES THE PERCENT-OF-SALES FORECAST METHOD SUFFER FROM?
1. The balance sheet of the Thompson Crown Company (TCC) follows:Thompson Crown Company Balance Sheet December 31 2015 ($ millions)Current Assets$10Net Fixed Assets?15Total$25Accounts payable$5Notes payable0Bonds payable10Common equity10Total $25TCC had sales for the year ended 12/31/15 of $50 million. The firm follows a policy of paying all net earnings out to its common stockholders in cash dividends. Thus TCC generates no funds from its earnings that can be used to expand its operations. (Assume that depreciation expense is just equal to the cost of replacing worn-out assets.)· If TCC anticipates sales of $80 million during the coming year develop a pro forma balance sheet for the firm for 12/31/16. Assume that current assets vary as a percent of sales net fixed assets remain unchanged and accounts payable vary as a percent of sales. Use notes payable as a balancing entry.· How much “new” financing will TCC need next year?· What limitations does the percent-of-sales forecast method suffer from? Discuss briefly.2. (Identifying spontaneous temporary and permanent sources of financing) classify each of the following sources of new financing as spontaneous temporary or permanent (explain):• A manufacturing firm enters into a loan agreement with its bank that calls for annual principal and interest payments spread over the next four years.• A retail firm orders new items of inventory that are charged to the firm’s trade credit.?• A Crown firm issues common stock to the public and uses the proceeds to upgrade its tractor fleet.BOOK REFERENCE:Vernimmen P. Quiry P. Dallocchio M. Le Fur Y. & Salvi A. (2014). Corporate finance: Theory and practice (4th ed). Chichester West Sussex UK: John Wiley & Sons
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