Question

At year-end 2016, total assets for Arrington Inc. were $1.8 million and accounts payable were $325,000. Sales, which in 2016 were $2.4 million, are expected to increase by 15% 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 $445,000 in 2016, and retained earnings were $260,000. Arrington plans to sell new common stock in the amount of $65,000. The firm's profit margin on sales is 4%; 40% of earnings will be retained.

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.
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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.)
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Answer 1

Question 1: For year 2016

Total Assets: 1,800,000

Total Liabilities = Short Term Liabilities + Long Term Liabilities = A/C Payables + Long Term Liabilities = 325,000 + X

Net Equity = Common Stock + Retained Earning = 445,000 + 260,000 = 705,000

Using, Total Assets -  Total Liabilities = Net Equity -> substituting and solving for Total Liabilities gives,

-> Total Liabilities = Total Assets - Net Equity = 1,800,000 - 705,000 = 1,095,000

-> LT Debt = Total Liabilities - A/C Payables = 770,000

Question 2: For 2017: assets, sales and A/C payables all will increase by 15%. Moreover addition to retained earning will be 40% of sales margin which is 4% of sales.

Addition to retained earnings = Sales * Margin * RR = (Sales in 2016 * 1.15) *(0.04) *(0.4) = 44,160

Total Retained Earnings for 2017 = Retained Earnings from past year + RE this year = 260,000 + 44,160 = 304,160

Common Stock = Common Stocks from last year + Additional raising through new issuance = 445,000 + 65,000 = 510,000

-> Total Equity = 510,000+304,160 = 814,160

-> Total Assests = Assets from 2016 * 1.15 = 2,007,000

-> Total Liabilities = A/C payable from 2016 * 1.15 + LT Debt from 2016 + Additional Borrowings = (325,000*1.15)+(770,000)+(Y) = 373,750 + 770,000 + Y

Using, Total Assets -  Total Liabilities = Net Equity -> substituting and solving for Y gives,

2,007,000 - (373,750 + 770,000 + Y) = 814,160

Y = 2,007,000 - 373,750 - 770,000 - 814,160

Hence borrowing needed = 112,090