Problem 4-9B Financial forecasting (attachment)

4-9B. ( Financial forecasting—discretionary financing needed ) Symbolic Logic Corporation (SLC)

is a technological leader in the application of surface mount technology in the manufacture of

printed circuit boards used in the personal computer industry. The firm has recently patented an

advanced version of its original path-finding technology and expects sales to grow from their

present level of $5 million to $8 million in the coming year. Since the firm is at present operating

at full capacity, it expects to have to increase its investment in both current and fixed assets in

proportion to the predicted increase in sales.

 

The firm’s net profits were 7 percent of current year’s sales and are expected to be the same next

year. To help support its anticipated growth in asset needs next year, the firm has suspended plans

to pay cash dividends to its stockholders. In years past, a $1.25 per share dividend has been paid

 

annually.

 

SLC’s payables and accrued expenses are expected to vary directly with sales. In addition, notes

payable will be used to supply the funds needed to finance next year’s operations and that are not

forthcoming from other sources.

a. Fill in the table and project the firm’s needs for discretionary financing. Use notes

payable as the balancing entry for future discretionary financing needed.

b. Compare SLC’s current ratio and debt ratio (total liabilities/total assets) before the

growth in sales and after. What was the effect of the expanded sales on these two dimensions

of SLC’s financial condition?

c. What difference, if any, would have resulted if SLC’s sales had risen to $6 million in one

 

year and $8 million only after two years? Discuss only; no calculations are required.