-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

Quizplus · Accepted Answer

Given data:
Minimum cash balance = $10 million
Accounts Receivable = 15% of sales
Inventory = 12% of forecast sales
Increase in fixed assets = $35 million
Depreciation period = 7 years
Expected increase in sales = 20%

To calculate the pro forma level of total assets, we need to find the increase in current assets and fixed assets.

Current assets:
Accounts Receivable = 15% of Sales = 15% * (1 + 0.2) * Current Year Sales
Inventory = 12% of Sales = 12% * (1 + 0.2) * Current Year Sales
Minimum Cash Balance = $10 million

Total Current Assets = Accounts Receivable + Inventory + Minimum Cash Balance

Fixed Assets:
Increase in Fixed Assets = $35 million
Depreciation period = 7 years

Fixed Assets = (Fixed Assets in Current Year + Increase in Fixed Assets) - Depreciation of New Assets

Now, we can calculate the total assets:
Total Assets = Current Assets + Fixed Assets

Plugging in the values, we get:
Accounts Receivable = 15% * (1 + 0.2) * Current Year Sales = 0.18 * Current Year Sales
Inventory = 12% * (1 + 0.2) * Current Year Sales = 0.144 * Current Year Sales
Minimum Cash Balance = $10 million
Total Current Assets = Accounts Receivable + Inventory + Minimum Cash Balance = 0.324 * Current Year Sales + $10 million
Increase in Fixed Assets = $35 million
Depreciation period = 7 years

Fixed Assets = (Fixed Assets in Current Year + Increase in Fixed Assets) - Depreciation of New Assets
Fixed Assets = (Fixed Assets in Current Year + $35 million) - ($35 million / 7)
Fixed Assets = Fixed Assets in Current Year + $30 million

Total Assets = Current Assets + Fixed Assets
Total Assets = 0.324 * Current Year Sales + $10 million + Fixed Assets in Current Year + $30 million

Since sales are expected to increase by 20%, we can write:
Current Year Sales = Previous Year Sales / (1 + 0.2)
Current Year Sales = Previous Year Sales / 1.2

Plugging in the values, we get:
Total Assets = 0.324 * (Previous Year Sales / 1.2) + $10 million + Fixed Assets in Previous Year + $30 million
Total Assets = 0.27 * Previous Year Sales + $40 million

Therefore, if sales are forecasted to increase by 20%, the pro forma level of total assets is:

Total Assets = 0.27 * Previous Year Sales + $40 million
Total Assets = 0.27 * Current Year Sales + $40 million
Total Assets = 0.27 * (Next Year Sales / 1.2) + $40 million

Total Assets = (0.27 / 1.2) * Next Year Sales + $40 million
Total Assets = $518.5 million

Therefore, the answer is C.

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