William Taylor and Associates (A) Harvard Case Solution & Analysis

The owner of a small consulting firm is faced with conflicting goals in the choice of organizational form for their firm. This case is aimed at structuring objectives and associated performance indicators. See also In case (UV0724).

What is the amount of Additional Funds Needed (AFN) for the year 2014, using both the AFN formula and a pro-forma balance sheet using the pct. of sales method? Both methods should give you the same result. Assume that net profit margin remains unchanged as a percent of sales compared with 2013.

The amount of additional funds needed for the year 2014 is $155,370.  For computation of AFN (Additional fund needed) two different methods are used: one is through AFN method and another is percentage of sales method using pro-forma balance sheet. The net profit margin is same i.e. 3% which is computed through AFN method by subtracting the increase in total liabilities and total retained earnings from the increase in total assets. The total assets increased by 74% in the year 2014, whereas the equity increased by 66% in the year of 2014. Similarly, in the percentage of sales method using pro-forma balance sheet, the current assets are in proportion to sales i.e. cash is 0.35%, accounts receivables is 8.33% and inventory is 16.67% to sales. Hence, the total current assets are 25.35% to sales in 2014 which is identical to that in 2013. The net fixed assets are assumed to remain same as they were in 2013 i.e. $367,500.  Misc. long term assets are kept constant at $7,500. Total current liabilities are alike in the year 2014 as they were in 2013 i.e. 18.92%. After computation of both methods, the results are found to be the same as additional funds required sums up to $155,370.

Note:  Working attached as reference Exhibit B, C & E

Irrespective of your answer in Question 2), now assume that, in 2014, while doubling its level of sales (and still keeping operating assets, COGS, and operating expenses stable in proportion sales), the company wishes to bring its Days Payable down to a more acceptable level of 60 days. What will then be the level of AFN?

The company’s current accounts payables are $682,500 in 2013, whereas the accounts payables will be doubled in 2014. In the year 2012, the company’s days payables outstanding were 86, as it was extremely necessary to pay off the creditors at the right time for further business. The organizations plan to clear their creditors’ balances in a shorter period of time. Similarly, Taylor Inc. wants to reduce the number of days regarding payable outstanding to 60. The accounts payable will be reduced to $952,326 and the company will need more cash to pay off its creditors amounting to $412,674.

Note:  Working attached as reference Exhibit F.

How will these additional funds needed (found in Q.2) be split between Notes Payable, Long Term Debt, and Common Stock, assuming the following constraints?

Debt/Equity ratio cannot be greater than 2/1,

Current ratio cannot be lower than 2.0.

Additional amounts of common stock and long-term debt can only be obtained in multiples of $50,000 (i.e., no broken amounts). On the other hand, Short-term bank debt (N/P) can be obtained in broken amounts. These additional amounts will be added on Jan. 1st, 2014.

Taylor management wishes to minimize the dilution of company’s ownership.

If the company decides to pay off its creditors within 60 days, then there will be no change in notes payable and long term debt while the equity will rise to $1,059,805. The company will be able to maintain its current ratio at 2.014 and debt to equity ratio at 1.42.

Note:  Working attached as reference Exhibit G

Prepare the 2014 pro-forma Income Statement and Balance Sheet that reflects the constraints listed in question 3.

This Darden study. "Hide
by Michael B. McEnearney, Samuel E Bodily Source: Darden School of Business 11 pages. Publication Date: 05 April 1991. Prod. #: UV0723-PDF-ENG

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