Discuss wk3
Compute and evaluate Fuling’s external financing needed (EFN) in the event that sales grow 25% in the upcoming year, and explain each factor which the company must consider in planning for this level of growth. Specifically, consider capacity utilization and external financing needed.
Current base:
Sales $1,000
Costs 0.8(sales) = $800
Net fixed assets 1.8(sales) = $1,800
Current assets 0.2(sales) =$200
25% sales increased:
Sales $1,250
Costs 0.8(sales) =$1000
Net fixed assets 1.8(sales) =$2,250
Current assets 0.2(sales) =$250
In this case, the net fixed assets would increase by $450 (2,250 – 1,800). Current assets would also increase by $50 ($250-200). The total increase in the total assets is $500 ($450+$50). Adding the increase of $250 sales, the total assets = $750. There is an increase in liabilities and owner’s equity of $225, which subtracted from $750, resulting in an EFN of $525.
It is now essential to consider the capacity in which Fuling is functioning. At 80% current capacity, the company would not need to add any additional net fixed assets.
Full capacity=sales/capacity =$1000/0.8= $1250
Net fixed asset=1.8(sales)=$2250
This significantly decreases the external funds needed as no fixed asset expenditures are required. ($525-$450) = $75
Compute and evaluate Fuling’s options in the event that sales subsequently grow an additional 50% and the firm wishes to maintain current assets at 20% of sales, explaining which components of its financial policy the company must consider in planning for this level of growth. Specifically, consider profit margin, dividend policy, financial policy, and total asset turnover.
Additional 50% sales increased:
Sales= $1,875
Costs 0.8(sales)=$1500
Net fixed assets 1.8(sales)=$3375
Current assets 0.2(sales)=$375
In this case, net fixed assets would increase by $1125 ($3375-$2250), which would put it overcapacity and require additional external funding for net fixed assets, $3375 needed versus $2250 full capacity. The company could choose a short term, long term, or offer more equity of the company to finance initiatives.
In both cases, financial ratios such as profit margin, costs, dividends, and asset turnover are held constant. Net income must be improved by reducing costs or through greater operational efficiency. This would increase profit margin, which could allow increased internal funding of initiatives. In addition, coupling greater net income with allowing reduced dividends paid would also result in increased retained earnings, which could provide more incredible company wealth for investment. This strategy will enable greater external fund leveraging to drive growth through operational improvements; also, improving the total asset turnover through cost reduction could allow greater financial utilization of held assets (Carlson, 2019).
Reference
Carlson, R. (2019). Understanding and using the total asset turnover ratio. Retrieved from https://www.thebalancesmb.com/calculating-total-asset-turnover-ratio-393209
v/r
Simon
Student 2
Fuling Plastics: A Fork in the Road
First, dividend payments have a considerable impact on the pace at which capital structure adjustments are made (Ramalingegowda & Yup, 2021, p. 242). Capital structure modifications are faster when corporations pay lower cash dividends; they are slower when companies pay higher cash dividends (Ramalingegowda & Yup, 2021, p. 242). Second, dividend distribution behavior may clash with financing behavior, affecting the pace with which capital structure adjustments are made (Ramalingegowda & Yup, 2021, p. 242). When a company's dividends are dispersed insufficiently, the company's capital redundancy causes an imbalance in the goal capital structure, capital structure adjustment is slowed, and dividend distribution behavior clashes with capital demands (Ramalingegowda & Yup, 2021, p. 242). When a company's dividend payout is high, and it uses market timing financing, the dividend distribution behavior may clash with the equity financing behavior (Zou & Bai, 2022, p. 11).
A. Compute and evaluate Fuling’s external financing needed (EFN) in the event that sales grow 25% in the upcoming year, and explain each factor that the company must consider in planning for this level of growth. Specifically, consider capacity utilization and external financing needed.
Current Sales:
Sales $1,000
Cost (0.8*1,000) $800
Net fixed assets (1.8*1,000) $1,800
Current assets (0.2*1,000) $200
25% Sales Increase:
Sales $1,250
Costs (0.8*1250) $1,000
Net fix assets (1.8*1250) $2,250
Current assets (0.2*1250) $250
Dividends (250*0.333) $83.25
Retained Earnings (133+167) $300
Addition to Retained Earnings (250-83.25) $166.75
The net fixed assets would increase by $450 (2,250-1,800). The value of current assets would rise by $50 ($250-200). The overall asset growth is $500 ($450+$50). The total assets are $750 after adding the rise of $250 in sales. An increase of $225 in liabilities and owner's equity is deducted from $750, resulting in an EFN of $525. It is now necessary to assess Fuling's capability. The corporation would not need to add any new net fixed assets at its present capacity of 80%.
Full Capacity = Sales/Capacity
= 1000/0.8 = $1250
Net Fixed Asset = 1.8*1250 = $2250
Because no fixed asset expenditures are necessary, the amount of external cash required is drastically reduced ($525 - $450).
B. Compute and evaluate Fuling’s options in the event that sales subsequently grow an additional 50% and the firm wishes to maintain current assets at 20% of sales, explaining which components of its financial policy the company must consider in planning for this level of growth. Specifically, consider profit margin, dividend policy, financial policy, and total asset turnover.
Additional 50% Sales Increase:
Sales $1,875
Costs (0.8*1,875) $1,500
Net fix assets (1.8*1,875) $3,375
Current assets (0.2*1,875) $375
Dividends (375*0.333) $124.88
Retained Earnings (133+167+250) $550
Addition to Retained Earnings (375-124.88) $250.13
Net fixed assets would rise by $1125 ($3375-$2250), putting it above capacity and necessitating more external finance, i.e. $3375 needed against $2250 full capacity. The corporation might go with a short-term or long-term strategy, or issue additional company ownership to fund initiatives.
Financial parameters like profit margin, costs, dividends, and asset turnover are remain constant in both scenarios. Net income must be increased through lowering costs or increasing operational efficiency. This would boost profit margins, allowing for more internal funding of programs. A high total asset turnover ratio tells you that your assets are working very well for you, whereas a lower ratio shows the opposite. A high ratio is generally considered better, but it’s dependent on your business and industry (Carlson, 2019).
Furthermore, combining higher net income with lower dividends paid would result in higher retained earnings, which could lead to more business wealth for investment. This technique will allow for more outside funding and increase the financial use of owned assets by improving overall asset turnover by reducing cost.
Reference
Carlson, R. (2019). Understanding and Using the Total Asset Turnover Ratio. Retrieved from: https://www.thebalancesmb.com/calculating-total-asset-turnover-ratio-393209
Zou, Y. & Bai, Q. (2022). The Impact of Dividend Policies and Financing Strategies on the Speed of Firms’ Capital Structure Adjustment. Discrete Dynamics in Nature and Society Volume, Article ID 3209502, p. 1-12.
V/r
Migda