Problems:

1 . Lets say CU Industries reports that (1) its inventory turnover ratio = 3x = (Sales/Inventory) while the industry average is 4x. CUI wants to improve their ratio to 4x, and they say that they can do it without affecting sales or the profit margin or other asset turnover ratios. Demand for their products is high and growing. They think that sales can grow 20% if they can get external funding. How much external funding will they need for an expected 20% growth rate (use the AFN formula)

2. CSI Industries has the following ratios: A₀*/S₀ = 1.6; L₀*/S₀ = 0.4; profit margin = .10 and the payout ratio is 45%. Sales last year were $100 million. Assuming that those ratios remain constant, use the AFN equation to determine the maximum growth rate (the sustainable growth rate) CSI Industries can achieve without having to use (non-spontaneous) external funds.

3. What are the key factors on which external financing depends, as indicated in the AFN equation?

4. Certain liability and net worth items generally increase spontaneously with increases in sales. Which of the following increase spontaneously and which do not?

Accounts payable, notes payable to banks, accrued wages, accrued taxes, mortgage bonds, common stock, and retained earnings.