At year-end 2012, total assets for Shome Inc. were $1.2 million and accounts pay
ID: 2701120 • Letter: A
Question
At year-end 2012, total assets for Shome Inc. were $1.2 million and accounts payable were $375,000. Sales, which in 2012 were 2.5 million, are expected to increase by 25% in 2013. Total assets and accounts payable are proportional to sales and that relationship will be maintained. Shome typically uses no current liabilities other than accounts payable. Common stock amounted to $425,000 in 2012. and retained earnings were $295,000. Shome plans to sell new common stock in the amount of $75,000. The firm's profit margin on sales is 6%, and 40% of earnings will be paid out as dividends.
1. What was Shome's total debt in 2012?
2. How much new long-term debt financing will be needed in 2013.
(Hint: AFN - New Stock = New long-term debt) **Assume that Shome operated at full-capacity in 2012, and do not consider any financing feedback efforts.
Explanation / Answer
1) 1200000 = 375000 + long term debt + 425000 + 295000
long term debt = 105000
total debt = 375000 + 105000 = 480000
2) Assets/Sales (A*/S) = $1,200,000/$2,500,000 = 48%.
L*/Sales = $375,000/$2,500,000 = 15%.
2006 Sales = (1.25)($2,500,000) = $3,125,000.
AFN = (A*/S)(%u2206S) - (L*/S)(%u2206S) - MS1(1 - d) - New common stock
= (0.48)($625,000) - (0.15)($625,000) - (0.06)($3,125,000)(0.6) - $75,000
= $300,000 - $93,750 - $112,500 - $75,000 = $18,750.
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