Problem -
McNichol's 2016 balance sheet is shown below. All values are in millions. Sales in 2016 were $320M and Net Income was $16M. They paid 40% of Net Income out as dividends.
Balance Sheet as of 12/31/2016
Cash $ 16 Accounts Payable $ 32
Accounts Receivable 48 Notes Payable 20
Inventory 64 ____
Total Current Assets $ 128 Total Current Liabilities $ 52
Net Fixed Assets 160 Long-Term Debt 48
Common Stock 80
Retained Earnings 108
Total Assets $ 288 Total Liabilities & Equity $ 288
Assume that McNichol used their fixed assets at full capacity in 2016 and that projected sales for the coming year are $368M.
a. Calculate McNichol's external financing needed (EFN) for 2017.
Answer the following independent questions in words only:
b. Suppose fixed assets had been used at only 50% capacity in 2016. How would that affect McNichol's additional need for funds? Briefly explain.
c. Suppose McNichol plans to increase its capital intensity by automating more of its production process. How would this affect the additional need for funds? Briefly explain.
d. Would you expect McNichol's financing needs to increase or decrease if they institute a just-in-time inventory process that allows them to hold half the inventory levels that they normally have in the past? Briefly explain.
e. If McNichol's profit margin increases at the higher levels of sales, will additional funding needs change from what you calculated in (a)? Briefly explain.