Question

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 12%, 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: $   
   AFN: $   
2. 
   
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. 
   

Answer 1

a)

Total assets: 33,534

AFN (deficit) : 2,109

Calculation:

	2018	Forecast %	2019
Sales	36000	10%	39600
Operating costs	32440	10%	35684
Earnings before	3560		3916
Interests and taxes
Interest	460		672	[12% interest on notes payable and mortgage]
Pre tax earnings	3100		3244
Taxes 40%	1240		1297.6
Net income	1860		1946.4
Dividends 45%	837		875.88
Addition to RE	1023		1070.52

	2018	Forecast %	Proforma	Financing	2019
Cash	1,080.0	10%	1,188.0		1,188.0
AR	6,480.0	10%	7,128.0		7,128.0
Inventories	9,000.0	10%	9,900.0		9,900.0
Total Current Assets	16,560.0		18,216.0		18,216.0
Fixed Assets	12,600.0	10%	13,860.0		13,860.0
Total Assets	29,160.0		32,076.0		32,076.0
Accounts Payable	4,320.0	10%	4,752.0		4,752
Accruals	2,880.0	10%	3,168		3,168
Line of credit	-		-	2,109.3	2,109.3
Notes payable	2,100.0		2,100.0		2,100.0
Total Current liabilities	9,300.0		10,020.0		12,489.3
Mortgage bonds	3,500.0		3,500.0		3,500.0
Common stock	3,500.0		3,500.0		3,500.0
RE	12,860.0	1070.52	13,930.52		13,930.52
Total liabiliies and Equity	29,160.0		30,950.52		33,059.82
Deficit			(2,109.30)

The additional investment in assets = change in total assets, Because there are not short term investments:

   Additional investments in assets = $33,059.82 − $29,160 = 3,899.82

The additional financing from the increase in spontaneous liabilities and from the reinvested earnings is:  

Additional financing = [($4,752 + $3,168) – ($4,320 + $2,880)] + $1070.52

= $1,070.52 + $720 = $1790.52

   Financing surplus (deficit) = Additional financing – Additional assets

= $1790.52− $3,899.82 = −$2,109.30

Then, Line of credit should be $2,109.30

b. Total forecasted amount of the line of credit : 2,109

Explanation

Line of credit will be the amount of a financing deficit. So that is $2,109.30

PLEASE APPRECIATE THE WORK