Below are the 2017 financial statements for Aquatic Supplies Co. Also appearing are management’s forecasts for how individual financial statement items will vary in the future. The company expects sales to grow 12% next year. Aquatic Supplies finances all of its needs with 10-year long-term debt at 10% interest.
Prepare pro forma financial statements for Aquatic Supplies for 2018 assuming that long-term debt and interest expense remain at their 2017 levels. What is Aquatic’s external funding required for 2018?
Modify your forecast in part
(a) assuming that long-term debt and interest expense increase in order to make up the external funding required for 2018. How much additional long-term debt will be required under this assumption?
Why are your answers to part (a) and part (b) different?
Perform a sensitivity analysis of Aquatic Supplies Co.’s external financing needs as determined in part.
(b). Assume sales grow at 17% instead of 12%. How much total long-term debt would be required?
Perform a scenario analysis on the company’s projection as determined in part.
(b). Assume sales grow 20%, the cost of goods sold is 38% of sales, inventory falls from 5% of sales to 3%, and accounts receivable fall from 13% of sales to 10%. How much long-term debt is required in this scenario?
