Question

t year-end 2018, Wallace Landscaping’s total assets were $2.17 million, and its accounts payable were $505,000. Sales, which in 2018 were $2.8 million, are expected to increase by 15% in 2019. 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 $405,000 in 2018, and retained earnings were $280,000. Wallace has arranged to sell $120,000 of new common stock in 2019 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 2019. (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 7%, and 60% of earnings will be paid out as dividends.

What was Wallace's total long-term debt in 2018? Do not round intermediate calculations. Round your answer to the nearest dollar. $

What were Wallace's total liabilities in 2018? Do not round intermediate calculations. Round your answer to the nearest dollar. $

How much new long-term debt financing will be needed in 2019? (Hint: AFN - New stock = New long-term debt.) Do not round intermediate calculations. Round your answer to the nearest dollar. $

Answer 1

(a) At the end of 2018:

Total Assets = $ 2.17 million or 2170000, Accounts Payable = Current Liabilities = $ 505000, Common Stock = $ 405000 and Retained Earnings = $ 280000

Long-Term Debt = Total Assets - Current Liabilities - Common Stock - Retained Earnings = 2170000 - 505000 - 405000 - 280000 = $ 980000

(b) Total Liabilities = Long-Term Debt + Current Liabilities = 980000 + 505000 = $ 1485000

(c) Sales 2018 = $ 2.8 million or $ 2800000, Expected Increase in Sales = 15 %

Sales 2019 = 1.15 x 2800000 = $ 3220000

Net Profit Margin =7 % of Sales

Net Income = 0.07 x 3220000 = $ 225400

Addition to Retained Earnings = 100 - % paid as dividends = 100 - 60 = 40 % of Net Income = 0.4 x 225400 = $ 90160

Total Assets and Current Liabilities are directly proportional to Sales growth.

Expected Total Assets = 1.15 x 2170000 = $ 2495500 and Expected Current Liabilities = 505000 x 1.15 = $ 580750

Additional Financing Needed (AFN) = Expected Total Assets - Expected Current Liabilities - Common Stock - Retained Earnings - Long-Term Debt - Addition to Retained Earnings = 2495500 - 580750 - 405000 - 280000 - 980000 - 90160 = $ 159590

New Stock Issued = $ 120000

Additional Long-Term Debt Needed = AFN - New Stock Issued = 159590 - 120000 = $ 39590