New Worlds Chemicals Inc

In: Business and Management

Submitted By StRaph
Words 1658
Pages 7
New Worlds Chemicals Inc.
Section A
Assume (1) that NWC was operating at full capacity in 2008 with respect to all assets, (2) that all assets must grow at the same rate as sales, (3) that accounts payable and accrued liabilities also will grow at the same rate as sales, and (4) that the 2008 profit margin and dividend payout will be maintained. Under those conditions what would the AFN equation predict the company’s financial requirements to be for the coming year?
Solution
Additional Funds Needed (AFN) are also known as External Funding Required. In the following, the AFN equation is displayed for 2009:
AFN=(A^*/S_0 )∆S-(L^*/S_0 )∆S-M(S_1)(RR)
AFN=($1000/$2000)$500-($100/$2000)$500-0.0252($2500)(($50.4-$15.12)/$50.04)
AFN=0.5*$500-0.05*$500-0.0252($2500)(0.7)

AFN=$250-$25-$44.1=$180.9
Answer: NWC will need $180.9 million.
Section B
Consultations with several key managers within NWC, including production, inventory, and receivable managers, have yielded some very useful information.
(1) NWC’s high DSO is largely due to one significant customer who battled through some hardships the past 2 years but who appears to be financially healthy again and is generating strong cash flow. As a result, NWC’s accounts receivable manager expects the firm to lower receivables enough to make the DSO equal to 34 days without adversely affecting sales.
(2) NWC was operating a little below capacity, but its forecasted growth will require a new facility, which is expected to increase NWC’s net fixed assets to $700 million.
(3) A relatively new inventory management system (installed last year) has taken some time to catch on and to operate efficiently. NWC’s inventory turnover improved slightly last year, but this year NWC expects even more improvement as inventories decrease and inventory turnover is expected to rise to 10x.
Incorporate this information into the 2009…...

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