At year-end 2015, Wallace Landscaping’s total assets were $1.9 million and its a
ID: 2612530 • Letter: A
Question
At year-end 2015, Wallace Landscaping’s total assets were $1.9 million and its accounts payable were $390,000. Sales, which in 2015 were $2.1 million, are expected to increase by 20% in 2016. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Wallace typically uses no current liabilities other than accounts payable. Common stock amounted to $480,000 in 2015, and retained earnings were $220,000. Wallace has arranged to sell $50,000 of new common stock in 2016 to meet some of its financing needs. The remainder of its financing needs will be met by issuing new long-term debt at the end of 2016. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its net profit margin on sales is 5%, and 35% of earnings will be paid out as dividends.
How much new long-term debt financing will be needed in 2016? (Hint: AFN - New stock = New long-term debt.) Round your answer to the nearest dollar. Do not round intermediate calculations.
Explanation / Answer
Exepcted Sales =2100000*120% =
$ 2,520,000
Calculation of new long-term debt financing
2,015
2,016
Total assets =
$ 1,900,000
$ 2,280,000
2520000* (1900000/2100000)
Less: Accounts payable =
$ (390,000)
$ (468,000)
2520000* (390000/2100000)
Less: Common Stock
$ (480,000)
$ (430,000)
480000-50000
Less: Retained Earnings
$ (220,000)
$ (301,900)
Total long-term debt
$ 810,000
$ 1,080,100
New long-term debt financing 2016 = 1080100-810000
$ 270,100
Calculation of Retained Earnings 2016
Beginning Balance
$ 220,000
Add: Net income =2520000*5%
$ 126,000
Less: Dividend = 126000*35%
$ (44,100)
Ending Balance
$ 301,900
Exepcted Sales =2100000*120% =
$ 2,520,000
Calculation of new long-term debt financing
2,015
2,016
Total assets =
$ 1,900,000
$ 2,280,000
2520000* (1900000/2100000)
Less: Accounts payable =
$ (390,000)
$ (468,000)
2520000* (390000/2100000)
Less: Common Stock
$ (480,000)
$ (430,000)
480000-50000
Less: Retained Earnings
$ (220,000)
$ (301,900)
Total long-term debt
$ 810,000
$ 1,080,100
New long-term debt financing 2016 = 1080100-810000
$ 270,100
Calculation of Retained Earnings 2016
Beginning Balance
$ 220,000
Add: Net income =2520000*5%
$ 126,000
Less: Dividend = 126000*35%
$ (44,100)
Ending Balance
$ 301,900
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