Intermediate Financial Management (with Thomson One)

CYBERPROBLEM
negative, Cumberland will purchase additional short-term investments). Use an
interest rate of 9 percent for short-term debt (and for the interest income on
short-term investments) and a rate of 11 percent for long-term debt. No interest
is earned on cash. Use the beginning of year debt balances to calculate net
interest expense. Assume dividends grow at an 8 percent rate.
c. Now create a graph that shows the sensitivity of AFN to the sales growth rate.
To make this graph, compare the AFN at sales growth rates of 5, 10, 15, 20,
25, and 30 percent.
d. Calculate net operating working capital (NOWC), total operating capital,
NOPAT, and operating cash flow (OCF) for 2006 and 2007. Also, calculate the
free cash flow (FCF) for 2007.
e. Suppose Cumberland can reduce its inventory to sales ratio to 5 percent and its
cost to sales ratio to 83 percent. What happens to AFN and FCF?
Please go to the ThomsonNOW Web site to access any Cyberproblems.
PROBLEM
Please go to the ThomsonNOW Web site to access any Thomson ONE—Business
School Edition problems.
Betty Simmons, the new financial manager of
Southeast Chemicals (SEC), a Georgia producer of
specialized chemicals for use in fruit orchards, must
prepare a financial forecast for 2007. SEC’s 2006
sales were $2 billion, and the marketing department
A. 2006 BALANCE S HEET (MILLIONS OF D OLLARS)
is forecasting a 25 percent increase for 2007.
Simmons thinks the company was operating at full
capacity in 2006, but she is not sure about this. The
2006 financial statements, plus some other data, are
shown below.
Percent Percent
of Sales of Sales
Cash and securities $ 20 1% Accounts payable and accruals $ 100 5%
Accounts receivable 240 12% Notes payable 100
Inventories 240 12% Total current liabilities $ 200
Total current assets $ 500 Long-term debt 100
Net fixed assets 500 25% Common stock 500
Retained earnings 200
Total assets $1,000 Total liabilities and equity $1,000
314 • Part 2 Corporate Valuation