Question

Long-Term Financing Needed At year-end 2016, Wallace Landscaping’s total assets were $1.6 million and its accounts payable were $375,000. Sales, which in 2016 were $2.7 million, are expected to increase by 20% 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 $475,000 in 2016, and retained earnings were $260,000. Wallace has arranged to sell $155,000 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 profit margin on sales is 3%, and 50% of earnings will be paid out as dividends.

What was Wallace's total long-term debt in 2016? Round your answer to the nearest dollar.

What were Wallace's total liabilities in 2016? Round your answer to the nearest dollar.  

How much new long-term debt financing will be needed in 2017? (Hint: AFN - New stock = New long-term debt.) Round your answer to the nearest dollar.

Answer 1

Balance Sheet
		2012	2013		2012	2013
Current Assets		59,309	65,240	Accounts Payable	3,75,000	4,50,000
				Long term debt	4,90,000	5,31,400
				Common Stock	4,75,000	6,30,000
				Retained Earning	2,60,000	3,08,600
Total Assets		16,00,000	19,20,000	Total Liab and Equity	16,00,000	19,20,000

1. Total Long term debt in 2016 = 4,90,000. Since the total assets = 16,00,000, current liabilities = 375,000 & common stcok and retained earnings in total = 475,000 + 260,000 = 735000. Hence the Long term debt =

16,00,000 - 275,000 - 735,000 = 490,000

2. Account Payable = 375,000 and Long term debt = 490,000. The total liabilities in 2016 = 865,000

3.

	2017
Revenue	3240000 (120% of 2.7 million, the sale of 2016)
Profit Margin	3%
Profit	97200
Dividend @ 50%	48600
Retained Earnings	48600

The compnay's retained earnings in 2017 is 48,600 and the common stock issued by it in 2017 is 155,000 which is added to the retained earnings and common stock of 2016 to the figures for 2017. Te total assets and accounts payable are 59.26% and 13.89% of sales respectively in both 2016 & 2017. Hence, the long term debt finncing in 2017 is calculated as Total Assets - Accounts Payable - Common Stock and retained earnings

   19,20,000 - 450,000 - 630,000 - 308,600 = 531,400 = Total debt finncing needed in 2017.