Ceramic Structures has experienced rapid growth over the past several years. Sales are expected to grow at 15% per year for the next three years. Sales growth has been fueled by aggressive pricing as well as increased use of ceramics in high performance engines. Asset growth has been financed by internal funds as well as the increased use of debt. At the end of 2016, the debt was restructured with a new 10% seven-year loan with principal payments of $1 million per year. In addition a $1.5 million working capital line was negotiated in 2015. It was increased to $2.5 million in 2017 and $3.5 million in 2018. Interest is charged at prime + 1%. (For class, we will use 9%.) ash balances will be kept around $250,000 and the credit line will average $2 million.
1. Prepare pro-forma statements for Ceramic and determine their need for funds for the years 2015-2017.
2. Why is there a need for funds when Ceramic is generating a profit?
3. If expected sales growth fell to 8% per year, what would be Ceramic’s need for funds?
4. What would happen to Ceramic’s need for funds if accounts receivable increased to 25% of sales?
CERAMIC STRUCTURES ENGINEERING, INC.
BALANCE SHEETS
AT DECEMBER 31,
2010 2011 2012 2013 2014 Forecast
2,363 1,178 899 470 250
4,779 5,643 8,467 9,946 11,507
3,450 5,213 6,985 8,071 9,020
10,592 12,033 16,351 18,487 20,777
5,193 6,551 8,235 9,325 10,354
15,785 18,584 24,586 7,812 31,131
1,505 1,669 2,139 4,004 4,226
1,000 1,000 2,500
1,000 1,000 1,000
243 299 425 566 818
1,748 2,968 2,564 5,570 7,544
2,358 2,358 7,358 6,358 5,358
4,106 5,326 9,921 11,928 12,902
3,000 3,000 3,000 3,000 3,000
8,679 10,258 11,775 12,884 15,229
11,679 13,258 14,775 15,884 18,229
15,785 18,584 24,696 27,812 31,131