Question

At year-end 2016, total assets for Arrington Inc. were $1.5 million and accounts payable were $305,000. Sales, which in 2016 were $2.1 million, are expected to increase by 30% 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 $365,000 in 2016, and retained earnings were $320,000. Arrington plans to sell new common stock in the amount of $140,000. The firm's profit margin on sales is 4%; 65% of earnings will be retained.

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.)

Answer 1

	Solution:-
	For 2016
1. Calculation of Long term Debt in year 2016
	We Know that Total Assets = Shareholder's Fund + Total Liabilites
	Here,
	Shareholder's Fund= Common Stock + Retained Earnings
			=3,65,000+3,20,000
			=$685,000
	Total Assets of company in 2016= $1,500,000 (given)
	We Know that Total Assets = Shareholder's Fund + Total Liabilites
	$1,500,000 = $685,000 + Total Liabilities
	Total Liabilities = $ 1,500,000- $ 685,000
			= $815,000
	In total liablities there will be current liablities and long term liablities
	Total liablities = Long term liablities + Current liablities
	$815,000= Long term liablities+305,000
	Long Term Debt= $ 815,000 - $ 305,000
		=$510,000
	Calcualtion of long term loan required in 2017
	Sales in 2016 = $ 2,100,000
	Sales in 2017 =130% of 2016 sales
		=2,100,000%130%
		=$2,730,000
	Profit for 2017 = 4% of Sales
		=$2,730,000*4%
		=$109,200
	Given, Retention ratio =65%
	Retained earning for 2017 =$109,200*65%
		=$70,980
	Total asset and account payable will increase in the ratio of Sales i.e. 30% from Year 2016.
	Total asset in 2017= $ 1,500,000 X 130% = $ 1,950,000.
	Account payable in 2017 = $ 305,000 X 130% = $ 396,500.
	Common Stock in 2017= $ 365,000+ $140,000 = $ 505,000.
	Retained Earning in 2017 = $ 320,000+ $ 70,980= $ 390,980.
	Total Long term debt in year 2017
		= Total Asset - Common stock- retained earning- Account payable
		=$1,950,000-$505,000-$390,980-$396,500
		=$658,020
	New loan to be taken = Total long term debt in 2017- Existing loan
			=$658,020-$510,000
			=$148,020
	Hence the long term debt financincing needed in 2017 = $148,020.
	Peasse feel free to ask if you have any query in the comment section