At year-end 2013, Wallace Landscaping’s total assets were $1.4 million and its a
ID: 2748852 • Letter: A
Question
At year-end 2013, Wallace Landscaping’s total assets were $1.4 million and its accounts payable were $325,000. Sales, which in 2013 were $2.9 million, are expected to increase by 20% in 2014. 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 2013, and retained earnings were $250,000. Wallace has arranged to sell $80,000 of new common stock in 2014 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 2014. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its profit margin on sales is 5%, and 35% of earnings will be paid out as dividends. What was Wallace's total long-term debt in 2013? Round your answer to the nearest dollar. $ What were Wallace's total liabilities in 2013? Round your answer to the nearest dollar. $ How much new long-term debt financing will be needed in 2014? (Hint: AFN - New stock = New long-term debt.) Round your answer to the nearest dollar. $
Explanation / Answer
1)
Wallace's total long-term debt in 2013 = Total Asset - current liabilities - Common stock - retained earnings
Wallace's total long-term debt in 2013 = 1400000 - 325000 - 480000-250000
Wallace's total long-term debt in 2013 = 345000
2)
Wallace's total liabilities in 2013 = total long-term debt + current liabilities
Wallace's total liabilities in 2013 = 345000+325000
Wallace's total liabilities in 2013 = 670000
3)
AFN = Increase in Total Asset - Increase in Spontaneous Current Liability - Addition to retained Earning next year
AFN = Total Asset * Growth rate - Accounts Payable* grwoth rate - Sale*(1+growth rate)*Profit margin ratio * (1-payout ratio)
AFN = 1400000*20% - 325000*20% - 2900000*1.2*5%*(1-35%)
AFN = 101900
New stock = $ 80000
New long-term debt = AFN - New stock
New long-term debt = 101900-80000
New long-term debt = 21900
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