Question

(12-8) Stevens Textile Corporation’s 2016 financial statements are shown below: Balance Sheet as of December 31, 2016 (Thousands of Dollars) Cash $ 1,080 Accounts payable $ 4,320 Receivables 6,480 Accruals 2,880 Inventories 9,000 Line of credit 0 Total current assets $16,560 Notes payable 2,100 Net fixed assets 12,600 Total current liabilities $ 9,300 Mortgage bonds 3,500 Common stock 3,500 ______ Retained earnings 12,860 Total assets $29,160 Total liabilities and equity $ 29,160 Income Statement for December 31, 2016 (Thousands of Dollars) Sales $36,000 Operating costs 32,440 Earnings before interest and taxes $ 3,560 Interest 460 Pre-tax earnings $ 3,100 Taxes (40%) 1,240 Net income $ 1,860 Dividends (45%) $ 837 Addition to retained earnings $ 1,023

a. Suppose 2017 sales are projected to increase by 15% over 2016 sales. Use the forecasted financial statement method to forecast a balance sheet and income statement for December 31, 2017. The interest rate on all debt is 10%, and cash earns no interest income. Assume that all additional debt in the form of a line of credit is added at the end of the year, which means that you should base the forecasted interest expense on the balance of debt at the beginning of the year. Use the forecasted income statement to determine the addition to retained earnings. Assume that the company was operating at full capacity in 2016, that it cannot sell off any of its fixed assets, and that any required financing will be borrowed as notes payable. Also, assume that assets, spontaneous liabilities, and operating costs are expected to increase by the same percentage as sales. Determine the additional funds needed.

b. What is the resulting total forecasted amount of the line of credit?

Answer 1

a)Forecasted income statement and balance sheet is as below.

As mentioned in the problem, all the assets except Fixed Assets has increased @15% (same as Sales).

Also, all current liablities (Accounts payable and accruals) have increased @ 15%.

The balancing figure(difference between Assets and Liabilities) of 237.78 is the net additional fund required.

b) The Total Forecasted amount of Line of Credit stands as below:

Mortgage Bonds - 3500

Notes Payable - 2100

Additional loan taken - 237.78

Total = 5837.78