Question

Financing Deficit

Stevens Textile Corporation's 2018 financial statements are shown below:

Balance Sheet as of December 31, 2018 (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 January 1 - December 31, 2018 (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

1. Suppose 2019 sales are projected to increase by 10% over 2018 sales. Use the forecasted financial statement method to forecast a balance sheet and income statement for December 31, 2019. The interest rate on all debt is 7%, 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 2018, 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. Do not round intermediate calculations. Round your answers to the nearest dollar.
   Total assets: $ (NEED THIS)
   AFN: $ (NEED THIS)
2. (NEED THIS)
3. What is the resulting total forecasted amount of the line of credit? Do not round intermediate calculations. Round your answer to the nearest dollar.
   $   
4. In your answers to Parts a and b, you should not have charged any interest on the additional debt added during 2019 because it was assumed that the new debt was added at the end of the year. But now suppose that the new debt is added throughout the year. Don't do any calculations, but how would this change the answers to parts a and b?
   If debt is added throughout the year rather than only at the end of the year, interest expense will be HIGHTER 4  than in the projections of part a. This would cause net income to be LOWER 5 , the addition to retained earnings to be LOWER 6 , and the AFN to be HIGHER 7 . Thus, you would have to ADD IN 8  new debt.

Answer 1

a. Total Assets = $32076

b. AFN = Total Assets in 2019 - Total Liabilities in 2019 = $32076 - $30969 = $1107

c. Total Forecasted amount of the line of credit = $3207 ($1107 + $2100)

d. If debt is added throughout the year rather than only at the end of the year, interest expense will be HIGHER than in the projections of part a. This would cause net income to be LOWER, the addition to retained earnings to be LOWER, and the AFN to be HIGHER. Thus, you would have to ADD IN new debt.