New World Chemicals, Inc.: Case Study
CASE CONTEXT
New World Chemicals, Inc. (NWC) hired Sue Wilson as its new financial manager and consequently, Ms. Wilson has to produce a sound financial forecast for the company.
PROBLEM DEFINITION
In producing the financial forecast for NWC, Ms. Wilson has to determine the following:
Additional funds needed (AFN)
Free cash flow
In relation to the above, Ms. Wilson has to consider effects on the following items:
Operational capacity against sales projections
Assumptions in receivables management
Forecasted growth in fixed assets
Expected improvement in inventory handling
ANALYSIS FRAMEWORK
Methodology used in analysing the case is as follows:
Determine the initial forecast based on the following assumptions:
Operations is at full capacity
Sales to increase by 25% in 2009
All assets will grow at the same rate as sales
Accounts payable (AP) and accrued liabilities will also grow at the same rate as sales
Profit margin of 2.52% and dividend pay-out of 30% will be sustained in 2009
Integrate the following useful information in the initial forecast:
Days sales outstanding will improve from 43.8 days in 2008 to about 34 days in 2009
Fixed assets will increase to $700 million in 2009
Improvement in inventory turnover from 8.33 times in 2008 to 10 times in 2009
Determine the final forecast and compute for AFN.
Determine the free cash flow in 2009. Compare the initial scenario with the final forecast.
Determine the full capacity sales based on 85% operating capacity of fixed assets. Compute for the increase in fixed assets in order to compensate the projected increase in sales.
Analyse the effects of the following to AFN:
Dividend payout ratio
Profit margin
Capital intensity ratio
Lengthen purchases credit terms
ANALYSIS
Additional Funds Needed Determination
The financial requirement based on the initial forecast considering the following assumptions yielded a positive AFN of $180.90 million.
Sales
New World Chemicals, Inc. (NWC) hired Sue Wilson as its new financial manager and consequently, Ms. Wilson has to produce a sound financial forecast for the company.
PROBLEM DEFINITION
In producing the financial forecast for NWC, Ms. Wilson has to determine the following:
Additional funds needed (AFN)
Free cash flow
In relation to the above, Ms. Wilson has to consider effects on the following items:
Operational capacity against sales projections
Assumptions in receivables management
Forecasted growth in fixed assets
Expected improvement in inventory handling
ANALYSIS FRAMEWORK
Methodology used in analysing the case is as follows:
Determine the initial forecast based on the following assumptions:
Operations is at full capacity
Sales to increase by 25% in 2009
All assets will grow at the same rate as sales
Accounts payable (AP) and accrued liabilities will also grow at the same rate as sales
Profit margin of 2.52% and dividend pay-out of 30% will be sustained in 2009
Integrate the following useful information in the initial forecast:
Days sales outstanding will improve from 43.8 days in 2008 to about 34 days in 2009
Fixed assets will increase to $700 million in 2009
Improvement in inventory turnover from 8.33 times in 2008 to 10 times in 2009
Determine the final forecast and compute for AFN.
Determine the free cash flow in 2009. Compare the initial scenario with the final forecast.
Determine the full capacity sales based on 85% operating capacity of fixed assets. Compute for the increase in fixed assets in order to compensate the projected increase in sales.
Analyse the effects of the following to AFN:
Dividend payout ratio
Profit margin
Capital intensity ratio
Lengthen purchases credit terms
ANALYSIS
Additional Funds Needed Determination
The financial requirement based on the initial forecast considering the following assumptions yielded a positive AFN of $180.90 million.
Sales