Question

a)

Broussard Skateboard's sales are expected to increase by 25% from $7.8 million in 2016 to $9.75 million in 2017. Its assets totaled $4 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 7%. Assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Do not round intermediate calculations. Round your answer to the nearest dollar.

b)

Long-Term Financing Needed

At year-end 2016, Wallace Landscaping’s total assets were $1.7 million, and its accounts payable were $320,000. Sales, which in 2016 were $2.0 million, are expected to increase by 30% in 2017. 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 $355,000 in 2016, and retained earnings were $205,000. Wallace has arranged to sell $190,000 of new common stock in 2017 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 2017. (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 6%, and 60% of earnings will be paid out as dividends.

1. What was Wallace's total long-term debt in 2016? Do not round intermediate calculations. Round your answer to the nearest dollar.
   $
2. What were Wallace's total liabilities in 2016? Do not round intermediate calculations. Round your answer to the nearest dollar.
   $
3. How much new long-term debt financing will be needed in 2017? (Hint: AFN - New stock = New long-term debt.) Do not round intermediate calculations. Round your answer to the nearest dollar.

Answer 1

1.Additional funds needed=Reqd. increase in assets-Inc. in Spontaneous liabilities-Increase in Retained earnings

(4*25%)-((0.45+0.45)*25%)-(9.75*7%)=0.0925 millions or $ 925000

NOTE: Notes payables do not increase with sales

a.Wallace's total long-term debt in 2016=
Total assets=	1.7	mlns.
Liabilities:
A/cs. Payable	0.32	mlns.
Common stock	0.355	mlns.
Retained earnings	0.205	mlns.
Total	0.88	mlns.
LT debt (Bal. fig.)	0.82	mlns.
Total Liabilities	1.7	mlns.
ANSWER: LT debt(2016)	0.82	mlns.

b.Wallace's total liabilities in 2016
From a. above
A/cs. Payable	0.32	mlns.
LT debt	0.82	mlns.
Total Liabilities	1.14	mlns.

c..LT Financing needed=AFN-New stock

where AFN=Reqd. increase in assets-Inc. in Spontaneous liabilities-Increase in Retained earnings

AFN=(S0*Inc.%)-(AP0*Inc.%)-(S0*(1+Inc.%)*PM*(1-Div.P/O))

ie.(1.7*30%)-(0.32*30%)-(2*1.30*6%*(1-60%))=

0.3516

Millions

Net LT financing needed=

0.3516-0.190=

0.1616

mlns.

OR

$161,600