Due to its expansion, proprietary production had been shifted to Puerto Rico because of low wagelabor force in that area. Then the sales outlets had been established in Silicon Valley along with small plant for the design and production of aerospace industry. Short-term loans, secured by the pledge of receivables were obtained from the local bank to support this growing requirement. Regardlessextremely competition that made the product lifecycles had been cut short to 6-7 year cycle, the product almost trebled the sales so that the company`s investment in current asset expandedaccordingly.
The forecast for year-end 1989 current asset has been prepared to help in assessing thecompany`s immediate financing problem.a)
The growth prospects assumed;
Sales: $34 million
Cost of good sold: $20,74 million
Receivables: 22% (sales of raw material and work in process a four week`s rate of usage)The bank would lend up 90% of the account receivables balances outstanding.The interest rate charged rises to be 15.5% b)
The introduction of new product line assumed contribute to sales:
$5 million in 1990 and $6.5 million in 1991
$250.000 million (specialize equipment)
$90,000 (budget allocation)c)
Issue up to 400,000 shares new common stock ($5 per share from $6.5 after costs andexpenses)d)
Frequent delivery delays with five possibility inventories policies
To determine the financing requirements posed by growth, change of inventory policy, andintroduction of new product2.
To choose the best method of financing the production
The company`s financing opportunities were severely restricted by its current financial position andthe external financing possibilities was continued reliance on the reinvestment of earnings with no payment of dividends.