How much does cartwright need to borrow and when explain by

Question

Use the case study "Cartwright Lumber Company" to answer the questions-

1.

Year	2004	2004	2005	2006	2007	2008
Net Sales	$2,694
Growth rate in net sales		33.6%	20%	20%	20%	20%
Cost of goods sold/net sales		72.4%	72.4%	72.4%	72.4%	72.4%
GS&A expenses/net sales		24.4%	24.4%	24.4%	24.4%	24.4%
Long-term debt		$ 50	$ 43	$ 37	$ 30	$ 23
Current portion long-term debt		$ 7	$ 7	$ 7	$ 7	$ 7
Interest rate		8.0%	8.0%	8.0%	8.0%	8.0%
Tax rate		35.0%	35.0%	35.0%	35.0%	35.0%
Dividend/earnings after tax		0.0%	0.0%	0.0%	0.0%	0.0%
Current assets/net sales		28.8%	28.8%	28.8%	28.8%	28.8%
Net fixed assets		$ 157	$  160	$  163	$  166	$ 168
Current liabilities/ net sales		11.2%	11.2%	11.2%	11.2%	11.2%
Owner's equity (net worth)	$348

INCOME STATEMENT
	Equations	Forecast
Year	2004	2004	2005	2006	2007	2008
Net sales	=B3+(B3*C4)	$3,600	$4,320	$5,184	$6,220	$7,464
Cost of goods sold	=C5*C20	2,606	3,127	3,752	4,502	5,403
Gross profit	=C20-C21	994	1,193	1,432	1,718	2,061
GSA expense	=C6*C20	879	1,055	1,266	1,519	1,823
EBIT	=C22-C23	115	138	165	199	238
Interest expense	=(C7+C8)*C9	5	4	4	3	2
Earnings before tax	=C24-C25	110	134	162	196	236
Tax	=C10*C26	39	47	57	68	83
Earnings after tax	=C26-C27	72	87	105	127	153
Dividends paid	=C11*C28	0	0	0	0	0
Additions to retained earnings	=C28-C29	72	87	105	127	153
BALANCE SHEET
Current assets	=C12*C20	1,037	1,244	1,493	1,792	2,150
Net fixed assets	=C13	157	160	163	166	168
Total assets	=C33+C34	1,194	1,404	1,656	1,958	2,318
Current liabilities	=C14*C20	404	484	581	697	837
Long-term debt	=C7	50	43	37	30	22
Equity	=B15+C30	420	507	612	739	893
Total liabilities and	=C37+C38+C39	873	1,034	1,230	1,466	1,751
shareholder's equity
EXTERNAL FUNDING REQUIRED	=C35-C40	$321	$370	$426	$491	$567

Q1a. Discuss how the interest expense (row 25) calculation works and whether or not it includes the short term borrowing on the Cartwright balance sheet. HINT: What is the source of the data used in the ratio on row 14?

Q1b. How much does Cartwright need to borrow and when? Explain by citing specifics from the forecast.

Q1c. Does Cartwright have the ability to pay the interest expense? Explain by citing specifics from the forecast.

Q1d. Does Cartwright have the ability to repay the loan principal? Explain by citing specifics from the forecast.

2.

Year	2004	2004	2005	2006	2007	2008
Net Sales	$2,694
Growth rate in net sales		0.0%	0%	0%	0%	0%
Cost of goods sold/net sales		0.0%	0.0%	0.0%	0.0%	0.0%
GS&A expenses/net sales		0.0%	0.0%	0.0%	0.0%	0.0%
Long-term debt		$ 50	$ 43	$ 37	$ 30	$ 23
Current portion long-term debt		$ 7	$ 7	$ 7	$ 7	$ 7
Interest rate		0.0%	0.0%	0.0%	0.0%	0.0%
Tax rate		35.0%	35.0%	35.0%	35.0%	35.0%
Dividend/earnings after tax		0.0%	0.0%	0.0%	0.0%	0.0%
Current assets/net sales		0.0%	0.0%	0.0%	0.0%	0.0%
Net fixed assets		$ 157	$ 160	$ 163	$ 166	$ 168
Current liabilities/ net sales		0.0%	0.0%	0.0%	0.0%	0.0%
Owner's equity (net worth)	$348

INCOME STATEMENT
	Equations	Forecast
Year	2004	2004	2005	2006	2007	2008
Net sales	=B3+(B3*C4)	$2,694	$2,694	$2,694	$2,694	$2,694
Cost of goods sold	=C5*C20	0	0	0	0	0
Gross profit	=C20-C21	2,694	2,694	2,694	2,694	2,694
GSA expense	=C6*C20	0	0	0	0	0
EBIT	=C22-C23	2,694	2,694	2,694	2,694	2,694
Interest expense	=(C7+C8)*C9	0	0	0	0	0
Earnings before tax	=C24-C25	2,694	2,694	2,694	2,694	2,694
Tax	=C10*C26	943	943	943	943	943
Earnings after tax	=C26-C27	1,751	1,751	1,751	1,751	1,751
Dividends paid	=C11*C28	0	0	0	0	0
Additions to retained earnings	=C28-C29	1,751	1,751	1,751	1,751	1,751
BALANCE SHEET
Current assets	=C12*C20	0	0	0	0	0
Net fixed assets	=C13	157	160	163	166	168
Total assets	=C33+C34	157	160	163	166	168
Current liabilities	=C14*C20	0	0	0	0	0
Long-term debt	=C7	50	43	37	30	22
Equity	=B15+C30	2,099	3,850	5,601	7,352	9,104
Total liabilities and	=C37+C38+C39	2,149	3,893	5,638	7,382	9,126
shareholder's equity
EXTERNAL FUNDING REQUIRED	=C35-C40	($1,992)	($3,733)	($5,475)	($7,216)	($8,958)

FROM P 45 IN COHEN FINANCE WORKBOOK:
FOR EACH $1 CHANGE IN REVENUE:
Assumptions:
revenue		2694
net profit margin		1.6%
CHANGE IN ASSETS (USES OF FUNDS)					CHANGE IN LIABILITIES+EQUITY (SOURCES OF FUNDS)
			cents					cents
CURRENT ASSETS					CURRENT LIABILITIES
	RECEIVABLES	317				PAYABLES	256
	INVENTORY	418				OTHER ACCRUALS	39
CA/SALES			27.3		CL/SALES			11.0
FIXED ASSETS					LONG-TERM DEBT			0
	PLANT
	PROPERTY				EQUITY
	EQUIPMENT					INCR IN RET EARN/SALES		1.6
FA/SALES			0.0
					TOTAL FORECASTED SOURCES			12.6
					EXTERNAL FINANCING NEEDED			14.7
TOTAL FORECASTED  USES			27.3		ADJUSTED TOTAL FORECASTED SOURCES			27.3

Q2a. Explain how the p 45 table from the Cohen Finance Workbook, shown above starting on row 47, works and its  significance to Cartwright's (and most other businesses too) external financing needs problem.

Q2b. Revise the short-form forecast model from Q1, using the 'input cells zeroed' model at the top of this tab.

As the banker, assume a lower growth rate in sales, and explain, showing specifics from the revised forecast, how it helps Cartwright solve his external financing needed problem. Enter revised data in the blue cells, using your judgment.

Answer 1

By using the case study named ‘Cartwright Lumber Company’ to answer the following questions: Q1. Illustrate how the interest expense (row 25) computation works and whether or not it comprises the short term borrowing on the Cartwright balance sheet. Q2. Explain how much does Cartwright require to borrow and when? Describe by citing specifics from the forecast. Q3. Does Cartwright encompass the capability to pay the interest expense? Describe by citing specifics from the forecast. Q4. Does Cartwright encompass the capability to repay the loan principal? Describe by citing specifics from the forecast.