New World Chemicals Inc
Case (2)
NEW WORLD CHEMICALS INC
Financial Forecasting
Sue Wilson, the new financial manager of New World Chemicals (NWC), a California producer of specialized chemicals for use in fruit orchards, must prepare a financial forecast for 1998. NWC 's 1997 sales were $2 billion, and the marketing department is forecasting a 25 percent increase for 1998. Wilson thinks the company was operating at full capacity in 1997, but she is not sure about this. The 1997 financial statements, plus some other data, are given in Table 1.
Assume that you were recently hired as Wilson 's assistant, and your first major task is to help her develop the forecast. She asked you to begin by answering the following set of questions.
a. Assume (1) that NWC was operating at full capacity in 1997 with respect to all assets, (2) that all assets must grow proportionally with sales, (3) that accounts payable and accruals will also grow in proportion to sales, and (4) that the 1997 profit margin and dividend payout will be maintained. Under these conditions, what will the company 's financial requirements be for the coming year?
b. Now estimate the 1998 financial requirements using the projected financial statement approach. Assume (1) that each type of asset, as well as payables, accruals, and fixed and variable costs, grow at the same rate as sales; (2) that the payout ratio is held constant at 30 percent; and (3) that external funds needed are financed 50 percent by notes payable and 50 percent by long-term debt (no new common stock will be issued).
c. Why do the two methods produce somewhat different AFN forecasts? Which method provides the more accurate forecast?
d. Calculate NWC 's forecasted ratios, and compare them with the company 's 1997 ratios and with the industry averages. How does NWC compare with the average firm in its industry, and is the company expected to improve during the coming year?
e. Suppose you now learn that NWC 's 1997 receivables and inventory were in line
NEW WORLD CHEMICALS INC
Financial Forecasting
Sue Wilson, the new financial manager of New World Chemicals (NWC), a California producer of specialized chemicals for use in fruit orchards, must prepare a financial forecast for 1998. NWC 's 1997 sales were $2 billion, and the marketing department is forecasting a 25 percent increase for 1998. Wilson thinks the company was operating at full capacity in 1997, but she is not sure about this. The 1997 financial statements, plus some other data, are given in Table 1.
Assume that you were recently hired as Wilson 's assistant, and your first major task is to help her develop the forecast. She asked you to begin by answering the following set of questions.
a. Assume (1) that NWC was operating at full capacity in 1997 with respect to all assets, (2) that all assets must grow proportionally with sales, (3) that accounts payable and accruals will also grow in proportion to sales, and (4) that the 1997 profit margin and dividend payout will be maintained. Under these conditions, what will the company 's financial requirements be for the coming year?
b. Now estimate the 1998 financial requirements using the projected financial statement approach. Assume (1) that each type of asset, as well as payables, accruals, and fixed and variable costs, grow at the same rate as sales; (2) that the payout ratio is held constant at 30 percent; and (3) that external funds needed are financed 50 percent by notes payable and 50 percent by long-term debt (no new common stock will be issued).
c. Why do the two methods produce somewhat different AFN forecasts? Which method provides the more accurate forecast?
d. Calculate NWC 's forecasted ratios, and compare them with the company 's 1997 ratios and with the industry averages. How does NWC compare with the average firm in its industry, and is the company expected to improve during the coming year?
e. Suppose you now learn that NWC 's 1997 receivables and inventory were in line