Accounting assignment

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question three Vasco millers Ltd. is in the process of forecasting its financial needs for the coming year ending 31 October 2003. The company attained a turnover ofSh.300 million for the current year ended 31 October 2002. The following are the summarized financial statements of the company for the year ended 31 October 2001: Profit and Loss Account Sh.’million’ Turnover 300 Profit before tax 54 Taxation 18 Profit after tax 36 Dividend 9 Retained profit 27 Balance Sheet Sh.’million’ Net Assets: Fixed assets (net) Current assets Current liabilities 146 103 Financed by: Issued ordinary shares 50 Reserves Sh.’million’ 190 43 233 90 140 Medium and long-term Debt 93 233 From past experience, it has been disclosed that each additional Sh.1 of sales made by the company requires, on average, a total investment in fixed assets, stocks and debtors of Sh.1.50. The Sh.1 additional sales also results in the generation of automatic financing of 40 cents as various creditors spontaneously arise with the increase in sales. The net profit margin after tax and the dividends payout ratio which apply for the year ended 31 October 2002 will also be relevant into the foreseeable future. Required: (a) The amount of external finance that will be needed during the year ending 31 October 2003 if sales are expected to increase by 15% in the year. (4 marks) (b) The maximum expected sales growth that can be achieved in the year ending 31 October 2003 if only internally generated funds are used. (6marks) (c) The maximum growth in sales that can be achieved in the year ending 31 October 2003 if the company wishes to maintain its current level of financial gearing. (6 marks) (d) Briefly comment upon the weaknesses of the method of forecasting used above. (4 marks)

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