2012 Commencing the expansion by constructing a new plant and by purchasing equipment, financed partly by selling the remaining long-term investments of $32 million.. To en[r]
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Lancaster Corporation
Lancaster Corporation is assessing its three-year plan on plant modernization and expansion The company is in a capital – intensive industry where plant and equipment can become obsolete in a few years This plan is as follows:
2011 Modernization by replacing obsolete equipment
2012 Commencing the expansion by constructing a new plant and by purchasing equipment, financed partly by selling the remaining long-term investments of $32 million
2013 Completing the expansion and starting the operating of the new plant at the beginning of 2014 Of the total cost of $190 million incurred in 2014 ($52 million for plant and $ 138 million for equipment), $170 million will be financed equally by issuing bonds payable and capital stock
To enhance the attractiveness of its capital stock issue, the company wants to continue its long-established dividend policy of about 8% on capital, which will require a cash dividend of $38 million in 2014 Also, the company will have more than half of its assets financed by debts after issuing the bonds payable in 2013 The new and old bond indentures (bonds were also issued prior to 2011) will require the company to maintain a minimum cash balance of $30 million for 2014 and subsequent years It is expected that the net income for 2014 will be similar to that for 2013
The comparative statements of changes in financial position for 2012 and 2013 are presented below LANCASTER CORPORATION
Comparative Statements of Cash Flows For 2012 and 2013
(in millions of dollars)
2013 2012
Operating activities:
Net Income 12 16
Add: Expenses not requiring the use of cash – Depreciation
Decrease in accounts receivable
Decrease in inventories 2
Increase in account payable 10
Increase in accrued liabilities
Cash provided by operating activities 39 30
Investing activities:
Sale of long-term investments 32 62
Construction of plant (90)
Purchase of equipment (36) (60)
Cash used in investing activities (94)
Financing activities:
Issuance of bonds payable 116
Cash dividends (30) (30)
Cash provided by financing activities 86 (30)
Increase in cash 31
Cash Balance 41 10
Instructions
Assess the company’s liquidity position for 2013
Comment on the company’s cash policies on operating, financing, and investing activities in 2013