Lindsey Insurance Co has current sales of $10 million and predicts next year's sales will grow to $14 million
Current assets are $3 million and fixed assets are $4 million. The firm's net profit margin is 7 percent after taxes.
Presently, Lindsey has $900,000 in accounts payable, $1.1 million in long-term debt, and $5 million (including
$2.5 million in retained earnings) in common equity. Next year, Lindsey projects that current assets will rise in
direct proportion to the forecasted sales, and that fixed assets will rise by $500,000. Lindsey also plans to pay
dividends of $400,000 to common shareholders.
a. What are Lindsey's total financing needs for the upcoming year?
b. Given the above information, what are Lindsey's discretionary financing needs?
a. Projected Financing Needs = Projected Total Assets =
Projected Current Assets + Projected Fixed Assets =
$3m/$10m × $14m + $4m + $.5m = $8.7m
b. DFN = Projected Current Assets + Projected Fixed Assets Present LTD -
Present Owner's Equity - [Projected Net Income-Dividends] - Spontaneous Financing = $3m/$10m × $14m +
$4.5m - $1.1m - $5m[.07 × $14m - $.4m] - $.9m/$10m × $14m
DFN = $4.2m + $4.5m - $6.1m - $.58m - $1.26m = $.76m
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