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?
Question 2
Interstate Appliance Inc is considering the following 3 mutually exclusive projects.
Projected cash
flows for these ventures are as follows:
Plan A Plan B Plan C
Initial Initial Initial
Outlay = 3,600,000 Outlay = 6,000,000 Outlay = 3,500,000
Cash Flow: Cash Flow: Cash Flow:
Yr 1 = -0- Yr 1 = 4,000,000 Yr 1 = 2,000,000
Yr 2= -0- Yr 2 = 3,000,000 Yr 2 = -0-
Yr 3 = -0- Yr 3 = 2,000,000 Yr 3 = 2,000,000
Yr 4 = -0- Yr 4 = -0- Yr 4 = 2,000,000
Yr 5 = 7,000,000 Yr 5 = -0- Yr 5 = 2,000,000
If Interstate Appliance has a 12 cost of capital, what decision should be made regarding the
projects above?
A) accept plan A B) accept plan B
C) accept plan C D) accept Plans A, B and C
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