Financial Management Analysis & Debt Reduction

This assignment delves into the financial health of a company facing high long-term debt. It presents a comparative analysis of the company's financial statements before and after implementing potential changes. Key areas addressed include total liabilities and equity, debt reduction strategies like increasing sales and profitability, right issues, and effective inventory management to improve cash flow. The goal is to analyze the impact of these strategies on the company's overall financial stability.

Managerial finance

TABLE OF CONTENTS
Problem 17-7:.............................................................................................................................3
Problem 17-8..............................................................................................................................4
A. Total Liabilities in 2015 :..................................................................................................5
B. New long-term debt financing needed in 2016 :...............................................................5
References..................................................................................................................................8

PROBLEM 17-7:
Financial forecasting is a very important activity undertaken for the success of the business
and effective management of their working capital as well as cash flow (Besley & Brigham,
2013). All the forecast is based on a reasonable idea of revenue expected to be received over
a given time and necessary expenses expected to be incurred (Petty and et.al. 2015). The said
forecasts generally are reviewed and revised annually as new income and costs related
information is available enabling business for more accurate projections (Reider, 2016). For
an established company, it is easier to make an accurate financial forecast without much
fluctuations to its revenue and cost data.
Based on the information provided by the company’s CFO, the forecast has been projected in
a table format below:
 Following year sales are expected to be 10% higher means following year sales will
be 110% of $ 3 billion.
 Year-end operating costs are expected to be 80% sales, excluding depreciation.
 Depreciation will be 10% higher than last year
 Interest costs are projected to remain same.
 The tax rate to remain at 40%.
Projected Income Statement
At the end of following year
Particulars
Amount at
end of last
year
( in million
$ )
Expected
forecast of
changes in
following
year
Expected in
following
year
( in million
$ )
Sales 3000 10 % higher 3300
Less: Operating cost excluding
depreciation -2450 80 % of sales -2640

EBITDA (Earnings before Interest,
Tax, Depreciation and amortization) 550 660
Less: Depreciation -250 10 % higher -275
EBIT (Earnings before Interest and
Tax) 300 385
Less: Interest -125 same -125
EBT (Earnings before Tax) 175 260
Less: Taxes (40 % of EBT) -70 same -104
Net Income 105 156
The net income of Roberts Inc. for the following year-end will be $ 156 million. This will be
$ 51 million more than the last year Net income i.e. 48.57 % higher.
PROBLEM 17-8
For Ambrose Inc.
Total Assets in 2015 = $ 1,200,000
Total Assets in 2016 = $ 1,200,000 * 1.25 = $ 1,500,000
Accounts payable in 2015= $ 375,000
Account Payable in 2016 = $ 375,000 * 1.25 = $ 468,750
Sales in 2015 = $ 2,500,000
Expected to increase in sales = 25% in 2016
Sales in 2016 = $ 2,500,000 * 1.25 = $ 3,125,000
Total assets and accounts payable are proportional to sales and expected to grow at 25%.
Company uses no current liabilities other than accounts payable
Common stock in 2015 = $ 425,000

Retained earnings in 2015 = $ 295,000
Ambrose plans to sell new common stock in the amount of $75,000.
Profit margin on sales is 6%
Retained Earnings = 60%.
A. Total Liabilities in 2015:
Total assets = Total Liabilities + Equity
Total Liability = Total Assets – retained earnings - common stock
= $ 1,200,000 – $ 295,000 - $ 425,000
= $ 480,000
B. New long-term debt financing needed in 2016 :
Assets / Sales (A/S) = $ 1,200,000 / $ 2,500,000 = 48 %.
Accounts Payable / Sales (L/S) = $ 375,000 / $ 2,500,000 = 15 %.
2016 Sales (S1) = 1.25 * $ 2,500,000 = $ 3,125,000.
Change in sales = ∆S = $ 3,125,000 - $ 2,500,000 = $ 625,000
Profit Margin (M) = 6 % = 0.06
Retained Earnings (1-d) = 60 % = 0.60
Additional Funds Needed (AFN) = Projected increase in assets – spontaneous increase in
liabilities – any increase in retained earnings
= (A/S) * (∆S) - (L/S) * (∆S) – M * S1 (1 - d) - New common stock
= (0.48) ($ 625,000) - (0.15) ( $ 625,000 ) - (0.06) ( $ 3,125,000 ) (0.6) - $ 75,00
= $ 300,000 - $ 93,750 - $ 112,500 - $ 75,000
= $ 18,750.

Alternatively, The Percentage of Sales Method is used for calculation of long-term debt
finance:
Sale of new common stock = $75,000.
Profit Margin in 2016 = $2,500,000 x 1.25 x 0.06 = $187,500.
Retained Earnings in 2016 = NI x (1 - Payout) = $187,500 x 0.6 = $112,500.
Forecast
Basis % Additions (New
2015 2016 Financing)
Pro Forma
Total assets $ 1,200,000 0.48 $ 1,500,000
Current liabilities $ 375,000 0.15 $ 468,750
Long-term debt $ 105,000 $ 105,000
Total debt $ 480,000 $ 573,750
Common stock $ 425,000 75,000* $ 500,000
Retained earnings $ 295,000 112,500** $ 407,500
Total common equity $ 720,000 $ 907,500
Total liabilities and equity $ 1,200,000 $ 1,481,250
AFN = Long-term debt = $ 18,750

Suggestions to reduce the long-term debt financing are:
The very likely suggestion to reduce the long-term debt financing is by increasing sales and
the profitability of the business by adopting various measures in order to increase the direct
cash flow that generates from the sales (Lawrence, 2016). Some means for raising the sales
revenues and profitability are hiking the prices at which sales are made, adopting cost-cutting
measures, increase the sales made by inducing more customer base and marketing channels
already employed in more efficient manner, providing target based incentive system to
deploy existing staff in making higher sales, etc (Brigham & Ehrhardt, 2013). In addition to
this; management can focus on productivity in order to generate higher returns from the
existing available resources. This extra revenue can, therefore, be used in paying off existing
debts gradually and will assist business in managing required liquidity.
Right issue: To reduce level of debt company can make increase in equity portion for this
they can issue prospectus for right shares to attract existing shareholders. With this option
controlling authorities will not be dilutes and debt level will also be reduced.
Better management of inventory is the prominent area which will enhance the cash flows and
reduce the blockage of funds. The stock makes use of a substantial amount of the working
capital of the business (Gitman, Juchau & Flanagan, 2015). Proper estimates and calculations
can prevent keeping unnecessary high stocks of inventory occupying interest cost, credit
period, idle funds and unproductive space use. The most suitable method of inventory
management can be adopted by the business to reduce such unproductive cash flow
(McKinney, 2015).

REFERENCES
Besley, S., & Brigham, E. F. (2013). Principles of finance. Cengage Learning.
Brigham, E. F., & Ehrhardt, M. C. (2013). Financial management: Theory & practice.
Cengage Learning.
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson
Higher Education AU.
Lawrence, J. G. (2016). Principles of managerial finance.
McKinney, J. B. (2015). Effective financial management in public and nonprofit agencies.
ABC-CLIO.
Petty, J. W., Titman, S., Keown, A. J., Martin, P., Martin, J. D., & Burrow, M.
(2015). Financial management: Principles and applications. Pearson Higher
Education AU.
Reider, B. P. (2016). ACTG 202.02: Principles of Managerial Accounting.