Mr. Fix it is a light industrial manufacturer that began operations last year. Its most recent income
Question:
Mr. Fix it is a light industrial manufacturer that began operations last year. Its most recent income statement and balance sheet are provided below (figures 1 and 2).
Having had a most successful first year of operations, the owners would like to pay off the company’s long-term debt over the next year, focus on building a cash reserve to fund future dividend payments to its owners, and fund anticipated sales growth of 25% over the next year. They do not anticipate needing to purchase any new property, plant or equipment to aid sales growth as existing equipment has the capacity to manufacture existing demand.
The owners have set some strict cash management guidelines for the upcoming year, which include the maintenance of at least 90 day’s cash-on-hand. While they would like to eventually see dividend payments be around 50% of net after-tax income, for the next couple of years they would like to maintain the current 10% dividend payout ratio. Fix It’s accountant has confirmed that income taxes and depreciation expense will remain constant at 15% and 10% respectively. In addition, Bizzy Bank has confirmed that Fix It’s long-term interest rate will remain at 5% over the next year.
You have determined the following regarding industry standards for operating cycles in light manufacturing operations:
Operating Cycle Benchmarks | |
Accounts Payable (days) | 58 |
Accounts Receivable | 20 |
Inventory | 40 |
Industry Financial Benchmarks | |
Gross Profit | 42% |
Net Profit Margin | 12% |
Current Ratio | 2.25 |
Acid Test | 2.00 |
Age Accounts Receivable | 20 days |
Age Inventory | 40 |
Age Accounts Payable | 30 |
Total Asset Turnover | 20 |
Debt-to-Equity | 60% |
Return on Equity | 10.50% |
Return on Capital Employed | 9.80% |
Provide some recommendations on how Fix It can raise cash from internal operations, to fund the repayment of its long-term debt over the next year. Demonstrate how these recommendations will affect your projected financial statements over the next year.
Introduction to Management Accounting
ISBN: 978-0133058789
16th edition
Authors: Charles Horngren, Gary Sundem, Jeff Schatzberg, Dave Burgsta