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Mini Case Problem: Executive Fruit Essay

1332 words - 5 pages

George Hedderewick needs to develop a financial plan for Executive Fruit that needs to contain forecasted projections for 2005 - 2007. Financial planning is a method that will require George to consider the overall effect of financial and investment decisions. In financial planning, balance sheets, income statements, budgets and other sources of cash will need to be analyzed and projected. The financial planning will establish goals - standards for measuring performance and will be tied closely to the business' plan. These financial goals for the business will also be related to the business decisions because investment and financing decisions interact with one another. In this case, financial planning will help Executive Fruit think out ahead of time responses to changes in business conditions. Steps that can be taken in financial planning include analyzing finance and investment decisions for Executive Fruit; setting both short term and long term goals and devising a plan on how these goals will be achieved.One method that can assist in this process involves using planning models. Planning models will make it easier for George to view several different equations/scenarios that would save time and money for his company. This type of model will allow him to forecast the results of certain decisions and better aid in the planning phase.Using the projected growth of the company and using the 10% expansion the company should be getting a gain in around 5 years. To achieve this, the company needs to not exceed the debt ratio of 60% and each year needs to lower the debt ratio. If the company stays with a constant 40% debt ratio then even when the projected 10-15% interest rate raise the business should continue doing good.Since financial models do not identify the best financing plan, we will have to do determine the type of financing through a pro forma balancing sheet. Financial models only insure consistency between growth assumptions and financing plans. With this being said, if we use the data given in Chapter 18, Corporate Finance, we will assume that sales and operating costs are expected to be up 10% over 2002. We also can see that the firm will stick to its traditional dividend policy of paying out two thirds of its earnings. In addition to this, we will assume that the interest rates will remain at their current level and the executives will need 10% more fixed assets and net working capitol at the start of the year to support the larger sales volume. (Chapter 18, page 496) Firstly, we know that to balance, we need $68,000. The Executive Fruit Company needs to determine how to acquire these funds. Will it be from new debt or equity, or one or the other? Using the examples given in Chapter 18, 100 percent external financing is the best option. However, this option only applies if the assets are proportional to sales, they increase at a faster rate, and they have a higher growth rate of sales. With this in play, 100% external financing would...

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