Question

At year-end 2015, Wallace Landscaping’s total assets were $2.17 million, and it accounts payable worth $560,000. Sales, which in 2015 were worth $3.5 million, are expected to increase by 35% in 2016. 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 amount to $625,000 and in 2015, and other retained earnings were $395,000. Wallace has arranged to sell $195,000 dollars of new common stock in 2016 to meet some of its financing needs. The remainder of his financing needs will be met by issuing new long-term debt the end of 2016. (Because the data is added at the end of the year, there will be no additional interest expense due to the new debt). It’s that profit margin on sales is 5%, and 45% of earnings will be paid out as dividends. (A.) What were Wallace’s long-term debt and total liabilities in 2015? (B.) How much new long-term debt financing will be needed in 2016? (Hint: AFN - new stock = new long-term debt).

Answer for A is $590,000 and $1,150,000-- and B is $238,563. I need to know how you get those answers please.

Answer 1

HI lets start with solution

LEts start with Part A)

We know that Asset= Short term liabilities+long term liabilities+equity

So in 2015

Asset=$2.17 M

Account payable(short term liablity)=$560,000

Equity= Stock+retained earnng= 625,000+395000= 1,020,000

Hence long term liabilities= Asset-short term liabilities-equity=   

= 2.17-0.560-1.020 = $590,000

And total liabilities= short term liabilites+short term liabilites

= 590,000+560,000= $1,150,000

And for Part B

we need to find out the long term debt financing

Since sales is goinf to increase in2016 by 35% and asset and account payable are propotianate to sales.

Hence asset and account payable will also increae by 35%.

So asset in 2016= $2.17*135%= $2.9295 M

accounts payable in 2016= 560,000*135%= $756,000

Total Sales in 2016 = 3.5*135%= $4.725 M

Since profit margin = 5% hence net income= $236,250

And 45% is dividend so income after dividend = 236,250*55%= $129,937.5

So in retained earning = begininig retained earnig +income after div paid= $395,000+129,937.5= $524,937.5

So now we agin use the same formula in 2016

long term liabilities= Asset-short term liabilities-equity

= 2,929,500-756,000-524,937.5-625,000-195,000

=$828,563

He already had long term liabilities= $590,000

Hence remaining financing neede with long liabilities= 828,563-590000= $238563

Thanks