Fuling Plastics A Fork in the Road Fuling Plastics USA is a

Fuling Plastics: A Fork in the Road?

Fuling Plastics USA is a subsidiary of Fuling Global, Inc  (Links to an external site.)Links to an external site.(Nasdaq ticker symbol FORK). Fuling manufactures environmentally-friendly plastic food-service disposable products (‘disposables’). Their historic strength has been in the production of disposable cutlery, the quality and value of which has satisfied the exacting requirements of large, sophisticated, multinational purchasers that have decades of experience sourcing foodservice disposables. Fuling has built on that strength to deliver drinking straws, cutlery and serviceware, such as cups and plates, to customers around the world (Fuling Plastics USA, 2015). However, their largest customer base is in the United States, which accounts for more than 90% of their revenues. Fuling has been in discussion with Bunzl Distribution USA, which owns and operates more than 100 warehouses that serve all 50 states and Puerto Rico, as well as Canada, the Caribbean and parts of Mexico. Bunzl Distribution controls more than 4,000 employees and 400,000-plus items in stock at any time (Bunzl Distribution, 2016)

Scenario:

Assume that you are the finance manager for Fuling Plastics, USA. In speaking with other managers, the firm\'s chief executive officer (CEO) has determined that substantial opportunities for growth exist. You have been invited to discuss Fuling Plastics, USA\'s financial ability to take advantage of these opportunities. You are aware that acquisition of Bunzl’ssupply chain abilities and existing assets are seen as an important strategy in managing Fuling Plastics’ growth rate. Assume that current sales are $1,000. Fuling Plastics USA growth may exceed 50% in the upcoming year, and the Bunzl partnership may help alleviate the need for an expansion in fixed assets through other means. Using a percentage of sales methodology, assume that Fuling’s net fixed assets are a fixed percentage (180 percent) of its sales, while costs are a fixed 80% of sales, so the firm’s profit margin is constant. The company hopes to achieve at least a 25% growth in sales in the coming year. At the current level of sales, with Bunzl additions, capacity utilization will stand at 80%. Assume that Fuling maintains a fixed dividend ratio of 33.3%. Assume thatcurrent liabilities do not vary spontaneously with sales; we will disregard the effects of depreciation.

Question:

Compute and evaluate Fuling’s external financing needed (EFN) in the event that sales grow 25% in the upcoming year, and explain each factor which the company must consider in planning for this level of growth. Specifically, consider capacity utilization and external financing needed.

Solution

Increase in Sales 1000*125% 1250 Less : Cost 80%*1250 -1000 Net Income 250 Dividend 83.25 Additions to retained earnings 166.75 Current assets 1250*20% 250 Net Fixed assets 1250*180% 2250 Profit Margin 250/1250 0.2 Total Assets 250+2250 2500 In existing Sales Sales 1000 Less: Cost 800 Net Income 200 Net Fixed assets 1800 Current assets 200 2000 Increase in assets 2500-2000 500 Add: Increase in Sales 250 Total Assets 750 Increase in liabilities by 225 External financing needed 750-225 525