New World Chemicals, Inc.: Case Study

1255 WordsJan 22, 20136 Pages
CASE CONTEXT New World Chemicals, Inc. (NWC) hired Sue Wilson as its new financial manager and consequently, Ms. Wilson has to produce a sound financial forecast for the company. PROBLEM DEFINITION In producing the financial forecast for NWC, Ms. Wilson has to determine the following: Additional funds needed (AFN) Free cash flow In relation to the above, Ms. Wilson has to consider effects on the following items: Operational capacity against sales projections Assumptions in receivables management Forecasted growth in fixed assets Expected improvement in inventory handling ANALYSIS FRAMEWORK Methodology used in analysing the case is as follows: Determine the initial forecast based on the following…show more content…
Paying dividends will reduce the available funds of the company but is a way to increase shareholder value. Increasing or decreasing of DPR spells out the standing of the company to its shareholders. Reduction or not giving dividends for a period will reduce AFN but will mean that the company is struggling to provide enough profit. Shareholders may see this as a signal that further investments for the company are riskier. Profit Margin Profit margin and AFN have inverse relationship. As profit margin increases, AFN will decrease. This is true, however, only when volume of sales remains constant. More often the not when profit margin increases due to increase in prices, volume of sales will suffer, which may or may not increase the net profit itself. If increase in profit margin is caused by operational efficiency or simply reduction of costs, it is safe to say that volume of sales will not be affected. With this, AFN will decrease accordingly. Capital Intensity Ratio (CIR) CIR is a measure of how much money is invested to produce a dollar of sales revenue. Having a low CIR is favorable for a company. Assuming level of sales is increasing and assets are increasing at a slower rate, CIR will decrease and vice versa. This means that assets required to produce same amount of income is decreasing. If this is the condition, decreasing of CIR will reduce AFN. However, when
Open Document