NARRBEGIN: Kooshy

-Suppose Kooshy wishes to maintain a minimum $10 million cash balance,accounts receivable are forecast to be 15% of sales,and inventory is expected to be 12% of forecast sales.Also,the firm plans to add $35 million to fixed assets (depreciate the additional assets over seven years).What is the pro forma level of total assets if sales are forecasted to increase 20%?

Question

NARRBEGIN: Kooshy
  
-Suppose Kooshy wishes to maintain a minimum $10 million cash balance,accounts receivable are forecast to be 15% of sales,and inventory is expected to be 12% of forecast sales.Also,the firm plans to add $35 million to fixed assets (depreciate the additional assets over seven years).What is the pro forma level of total assets if sales are forecasted to increase 20%?

Quizplus · Accepted Answer

First, we need to calculate the total dollar amount of assets required to support the forecasted sales increase of 20%.

Total assets = minimum cash balance + accounts receivable + inventory + fixed assets + property, plant, and equipment (PPE)

Minimum cash balance = $10 million 
Accounts receivable = 15% of projected sales = 0.15 x (1 + 0.20) x $280 million = $47.25 million 
Inventory = 12% of projected sales = 0.12 x (1 + 0.20) x $280 million = $40.32 million 
Fixed assets = $35 million

PPE = Total assets - minimum cash balance - accounts receivable - inventory - fixed assets

PPE = (1 + 0.20) x $280 million - $10 million - $47.25 million - $40.32 million - $35 million 
PPE = $104.43 million

Total assets = minimum cash balance + accounts receivable + inventory + fixed assets + PPE 
Total assets = $10 million + $47.25 million + $40.32 million + $35 million + $104.43 million 
Total assets = $237 million

However, we need to remember that this is the pro forma level of total assets, which means we need to compare it to the current level of total assets to determine if the firm needs additional funding.

Current total assets = $200 million

Projected increase in total assets = $237 million - $200 million = $37 million

Since the firm plans to add $35 million to fixed assets, the additional funding needed would be $37 million - $35 million = $2 million.

Therefore, the answer is C) $519.

NARRBEGIN: Kooshy -Suppose Kooshy Wishes to Maintain a Minimum $10 Million Cash