LONG-TERM FINANCING NEEDED At year-end 2016, total assets for Arrington Inc. were $1.8 million and accounts...

LONG-TERM FINANCING NEEDED At year-end 2016, total assets for Arrington Inc. were $1.8 million and accounts payable were $445,000. Sales, which in 2016 were $3 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 $455,000 in 2016, and retained earnings were $260,000. Arrington plans to sell new common stock in the amount of $60,000. The firm's profit margin on sales is 7%; 65% 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. $ 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.) $

Expert Solution

Answer to Part 1:

Total Assets = $1,800,000
Total Assets = Total Liabilities + Total Stockholders’ Equity
Total Stockholders’ Equity = Common Stock + Retained Earnings
Total Stockholders’ Equity = $455,000 + $260,000
Total Stockholders’ Equity = $715,000

Total Assets = Total Liabilities + Total Stockholders’ Equity
$1,800,000 = Total Liabilities + $715,000
Total Liabilities = $1,085,000

Total Liabilities = Accounts Payable + Long Term Debt
$1,085,000 = $445,000 + Long term Debt
Long Term Debt = $640,000

Therefore, Total Liabilities in 2016 were $1,085,000.

Answer to Part 1:

Additional Fund Needed = Projected Increase in Assets – Spontaneous Increase in Liabilities – Increase in Retained Earnings

Projected Increased in Assets = $1,800,000 * 30% = $540,000
Spontaneous Increase in Liabilities = $445,000 * 30%= $133,500

Increase in Retained Earnings = Expected Sales * Profit Margin * Retention Ratio
Expected Sales = $3,000,000 + ($3,000,000 * 30%) = $3,900,000
Increase in Retained Earnings = $3,900,000 * 0.07 * 0.65
Increase in Retained Earnings = $177,450

Additional Fund Needed = $540,000 - $133,500 - $177,450
Additional Fund Needed = $229,050

New Long Term Debt = Additional Fund Needed - New Stock
New Long Term Debt = $229,050 - $60,000
New Long Term Debt = $169,050

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