LONG-TERM FINANCING NEEDED At year-end 2016, total assets for Arrington Inc. wer
ID: 2802228 • Letter: L
Question
LONG-TERM FINANCING NEEDED At year-end 2016, total assets for Arrington Inc. were $1.7 million and accounts payable were $330,000. Sales, which in 2016 were $2 million, are expected to increase by 20% in 2017, Total assets and accounts payable are proportional to sales, and that relationship will be maintained; that is, they will grow at the same rate as sales. Arrington | typically uses no current liabilities other than accounts payable. Common stock amounted to $395,000 in 2016, and retained earnings were $210,000. Arrington plans to sell new common stock in the amount of $155,000. The firm's profit margin on sales is 7%; 45% of earnings will be retained. a. What were Arrington's total liabilities in 2016? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Round your answer to the nearest cent. b. How much new long-term debt financing will be needed in 2017? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Do not round your intermediate calculations. Round your answer to the nearest cent. (Hint: AFN - New stock New long-term debt.)Explanation / Answer
Answer a.
Total Assets = Total Liabilities + Common Stock + Retained Earnings
$1,700,000 = Total Liabilities + $395,000 + $210,000
Total Liabilities = $1,095,000
Arrington’s total liabilities in 2016 is $1,095,000
Answer b.
Sales in 2017 = 120% * Sales in 2016
Sales in 2017 = 120% * $2,000,000
Sales in 2017 = $2,400,000
Profit Margin = 7% * Sales in 2017
Profit Margin = 7% * $2,400,000
Profit Margin = $168,000
Additions to Retained Earnings = Profit Margin * Retention Ratio
Additions to Retained Earnings = $168,000 * 45%
Additions to Retained Earnings = $75,600
Increase in Total Assets = Total Assets 2016 * Growth Rate
Increase in Total Assets = $1,700,000 * 20%
Increase in Total Assets = $340,000
Increase in Accounts Payable = Accounts Payable 2016 * Growth Rate
Increase in Accounts Payable = $330,000 * 20%
Increase in Accounts Payable = $66,000
Additional Fund Needed = Increase in Total Assets - Increase in Accounts Payable - Additions to Retained Earnings
Additional Fund Needed = $340,000 - $66,000 - $75,600
Additional Fund Needed = $198,400
New Long-term Debt = Additional Fund Needed - New Common Stock
New Long-term Debt = $198,400 - $155,000
New Long-term Debt = $43,400
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