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Refine Cash Balance and Consider Capital Structure
Consider the following actual 2019 data along with forecasted 2020 data for selected balance sheet and
income statement numbers.
$ millions FY2019 Actual FY2020 Est. $ millions FY2019 Actual FY2020 Est.
Net sales. . . . . . . $29,009 $32,102 Cash . . . . . . . . . . . . . . . . 2,918 4,378
Total assets . . . . 14,592 16,051 Marketable securities . . . 730 730
Total liabilities. . . 8,755 9,923 Treasury stock . . . . . . . . (2,189) (2,627)
Total equity. . . . . 5,837 6,128
Required
a. Calculate the company's normal cash level as a percentage of net sales.
b. Determine the amount of adjustment needed to return cash to a normal level. Is an adjustment war-
ranted? Explain.
c. Compute the liabilities-to-equity ratio for both years. What do we observe?
d. Adjust marketable securities so the forecasted cash balance is at its normal level. What affect does
this have on the forecasted liabilities-to-equity ratio?
e. Adjust long-term debt so the forecasted cash balance is at its normal level. What effect does this have
on the forecasted liabilities-to-equity ratio?
f. Adjust treasury stock so the forecasted cash balance is at its normal level. What effect does this have
on the forecasted liabilities-to-equity ratio?
g. Adjust both long-term debt and marketable securities so as to adjust the forecasted cash balance. In so
doing, make sure we preserve the company's liabilities-to-equity ratio. (Hint: Use "Goal Seek" under
the "What-If Analysis" in Excel to determine the proportion of long-term debt versus treasury stock
needed to ensure the forecasted liabilities-to-equity ratio remains at its historical level.)
h. Adjust both long-term debt and treasury stock so as to adjust the forecasted cash balance. In so doing,
make sure we preserve the company's liabilities-to-equity ratio. (Hint: Use "Goal Seek" under the
"What-If Analysis" in Excel to determine the proportion of long-term debt versus treasury stock
needed to ensure the forecasted liabilities-to-equity ratio remains at its historical level.)
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