Financing Deficit Stevens Textile\'s 2015 financial statements are shown below:
ID: 2738111 • Letter: F
Question
Financing Deficit
Stevens Textile's 2015 financial statements are shown below:
Balance Sheet as of December 31, 2015 (Thousands of Dollars)
Income Statement for December 31, 2015 (Thousands of Dollars)
What is the resulting total forecasted amount of the line of credit? Round your answers to the nearest whole number. Do not round intermediate calculations. Enter your answer in thousands of dollars.
c) Notes payable (including line of credit) $ ????
In your answers to Parts a and b, you should not have charged any interest on the additional debt added during 2016 because it was assumed that the new debt was added at the end of the year. But now suppose that the new debt is added throughout the year. Don't do any calculations, but how would this change the answers to parts a and b?
d) If debt is added throughout the year rather than only at the end of the year, interest expense will be -Select-higher / lower than in the projections of part a. This would cause net income to be -Select-higher / lower , the addition to retained earnings to be -Select-higher / lower, and the AFN to be -Select-higher / lower. Thus, you would have to -Select-add in / subtract from new debt.
Financing Deficit
Stevens Textile's 2015 financial statements are shown below:
Balance Sheet as of December 31, 2015 (Thousands of Dollars)
Cash $ 1,080 Accounts payable $ 4,320 Receivables 6,480 Accruals 2,880 Inventories 9,000 Line of credit 0 Total current assets $16,560 Notes payable 2,100 Net fixed assets 12,600 Total current liabilities $ 9,300 Mortgage bonds 3,500 Common stock 3,500 Retained earnings 12,860 Total assets $29,160 Total liabilities and equity $29,160Income Statement for December 31, 2015 (Thousands of Dollars)
Sales $36,000 Operating costs 32,440 Earnings before interest and taxes $ 3,560 Interest 460 Pre-tax earnings $ 3,100 Taxes (40%) 1,240 Net income $ 1,860 Dividends (45%) $ 837 Addition to retained earnings $ 1,023 Suppose 2016 sales are projected to increase by 25% over 2015 sales. Use the forecasted financial statement method to forecast a balance sheet and income statement for December 31, 2016. The interest rate on all debt is 7%, and cash earns no interest income. Assume that all additional debt in the form of a line of credit is added at the end of the year, which means that you should base the forecasted interest expense on the balance of debt at the beginning of the year. Use the forecasted income statement to determine the addition to retained earnings. Assume that the company was operating at full capacity in 2015, that it cannot sell off any of its fixed assets, and that any required financing will be borrowed as notes payable. Also, assume that assets, spontaneous liabilities, and operating costs are expected to increase by the same percentage as sales. Determine the additional funds needed. Round your answers to the nearest whole number. Do not round intermediate calculations. Enter your answer in thousands of dollars. a) Total assets $ ??? b) AFN $ ???What is the resulting total forecasted amount of the line of credit? Round your answers to the nearest whole number. Do not round intermediate calculations. Enter your answer in thousands of dollars.
c) Notes payable (including line of credit) $ ????
In your answers to Parts a and b, you should not have charged any interest on the additional debt added during 2016 because it was assumed that the new debt was added at the end of the year. But now suppose that the new debt is added throughout the year. Don't do any calculations, but how would this change the answers to parts a and b?
d) If debt is added throughout the year rather than only at the end of the year, interest expense will be -Select-higher / lower than in the projections of part a. This would cause net income to be -Select-higher / lower , the addition to retained earnings to be -Select-higher / lower, and the AFN to be -Select-higher / lower. Thus, you would have to -Select-add in / subtract from new debt.
Explanation / Answer
Projected Income statement 2015 2016 Sales 36,000 45000 (increase by +25%) Operating costs 32,440 40550 (increase by +25%) Earnings before interest and taxes 3,560 4450 Interest 460 392 Pre-tax earnings 3,100 4058 Taxes (40%) 1,240 1623.2 Net income 1,860 2434.8 Dividends (45%) 837 1095.66 Addition to retained earnings 1,023 1339.14 Accruals and Accounts payable increase with sales as +25% Assume Assets increase with Sales as 25% 2015 2016 2015 2016 Cash 1,080 1350 Accounts payable 4,320 5400 Receivables 6,480 8100 Accruals 2,880 3600 Inventories 9,000 11250 Line of credit 0 0 0 Total current assets 16,560 20700 Notes payable 2,100 2,100 Net fixed assets 12,600 15750 Total current liabilities 9,300 11,100 Mortgage bonds 3,500 3,500 Common stock 3,500 3,500 Retained earnings 12,860 14,199 (Retained Earnings 2015+Addn in2016 of NI=12860+1339.4) Total assets 29,160 36450 Total liabilities and equity 29,160 32,299 Addition funds need(AFN) 4,151 Notes payable $ 6,251 (2100+4151) AFN=Total Assets in 2016-Total Liabs&Equity in 2016 Total assets $ 36450 AFN $ 4151.Notes payable $ 6251
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