Question

Financing Deficit

Stevens Textile Corporation's 2016 financial statements are shown below:

Balance Sheet as of December 31, 2016 (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	$29,160

Income Statement for January 1 - December 31, 2016 (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 2017 sales are projected to increase by 25% over 2016 sales. Use the forecasted financial statement method to forecast a balance sheet and income statement for December 31, 2017. The interest rate on all debt is 9%, 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 2016, that it cannot sell off any of its fixed assets, and that any required financing will be borrowed as a line of credit. 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 dollar. Do not round intermediate calculations.

Total assets ______	$
AFN ________	$

What is the resulting total forecasted amount of the line of credit? Round your answer to the nearest dollar. Do not round intermediate calculations.
Line of credit _______$

Answer 1

		Stevens Textiles
		2016	2017
	Sales	$         36,000.00	36000(1.25)=$45000
	Operating Cost	$         32,440.00	32440(1.25)=$40550
	EBIT	$           3,560.00	$4450
	Interest	$               460.00	($2100+$3500)*9%=$504
	EBT	$           3,100.00	$3946
	Tax	$           1,240.00	$1578
	EAIT	$           1,860.00	$2368
	Dividend	$               837.00	($2368*45%)=$1065
	Retained Earnings	$           1,023.00	$1302
		Stevens Textiles
		2016	2017	2017
	Assets
	Cash	$           1,080.00	1080*(1.25)=$1350	$                1,350
	Accounts Receivable	$           6,480.00	6480*(1.25)=$8100	$                8,100
	Inventories	$           9,000.00	9000*(1.25)=$11250	$             11,250
	Net Fixed Assets	$         12,600.00	12600*(1.25)=$15750	$             15,750
	Total Assets(1)	$         29,160.00		$             36,450
	Liabilties
	Accounts Payable	$           4,320.00	4320*(1.25)=$5400	$                5,400
	Notes Payables	$           2,100.00	$2100	$                6,287
	Accruals	$           2,880.00	2880*(1.25)=$3600	$                3,600
	Mortgage Bond	$           3,500.00	$3500	$                3,500
	Common Stock	$           3,500.00	$3500	$                3,500
	Retained Earnings	$         12,860.00	$12860	$             14,163
	Total Liabilities & Equity(2)	$         29,160.00		$             36,450
	AFN=(1)-(2)		(36450-$32263)=$4187
	Retained Earnings 31.12.2017
	Retained Earnings (1.1.2017)	$               12,860
	Add: Net Income during 2017	$                 2,368
	Less: Dividend	$                 1,065
	Retained Earnings	$               14,163
	Total Assets=	$         36,450.00
	Additional Funds Needed	$           4,187.00
	Line of Credit
	Note Payable=($2100+$4187)	$           6,287.00