Question

Problem 5 –    Using the data provided complete the following projected Balance Sheet for Mumford Inc. as of and for the year ended December 31, 2020. Credit (and total) sales were $2,100,000. (Type in your values)) The long term debt is all interest bearing. The total stockholders’ equity is a combination of issued common stock and retained earnings.   

Total asset turnover                       2.4 times

Cash to total assets                            2%

Accounts receivable turnover        8.0 times

Inventory turnover                          10.0 times

Current ratio                                       2.0 / 1.0

Debt to total assets                            61%                  

Assets                                                                     Liabilities

Cash                                                                              Current Debt

Accounts Receivable                                                  Long Term Debt

Inventory                                                                      Total Debt

        Total Current Assets

                                                                                   Stockholders’ Equity

Fixed Assets (net of depr)                                            Total Stockholders’ Equity

TOTAL ASSETS                                                          TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                        

Problem 5 continued –   Mumford Inc. is using a combination of debt and equity in its capital structure. Identify two specific pros and two specific cons of each form of capital (interest bearing debt and issued common stock) and reflect upon (briefly discuss) what makes the item you identified either a pro or a con. The remaining space on this page should be plenty of room for an effective answer.

Answer 1

Given,

Total Sales(all credit) = $ 2,100,000

Also given,Total asset turnover = 2.4 times

That is Sales/Total Assets = 2.4

Total assets = 2.4*sales = 2.4*2,100,000 = 5,040,000

Therefore, Total Assets = $ 5,040,000

Given,

Cash to Total Assets = 2%

Cash/Total assets = 2%

Cash = Total assets * 2% = $ 100,800

Therefore, Cash = $ 100,800

Given,

Accounts Recivable Turnover ratio = 8 times

That is credit sales/Accounts receivable = 8

Accounts Receivable = Credit sales/8

Accounts Receivable = 2,100,000/8 = $ 262,500

Given,

Inventory Turnover ratio = 10 times

Sales/inventory = 10

That is Inventory = sales/10 = 2,100,000/10

Inventory = 210,000

Total Current assets = 210,000+262,500+100,800 = $ 573,300

Given, Current Ratio = 2:1

That is Current Assets/Current Liabilities = 2/1

573,300/Current Liabilities = 2/1

That is current Liabilities = 573,300/2 = $ 286,650

Given,

Debt to Total Assets = 61%

Debt/Total Assets = 61%

That is Debt = Total Assets *61% = $ 5,040,000*61% = $ 3,074,400

Total debt - current debt = long term debt

3074400-286650 = $ 2,787,750 = Long term Debt

Total Assets - current assets = fixed assets

5,040,000 - 573,300 = $ 4,466,700 = Fixed assets

Total Shareholder's Equity = Total assets - Total debt = 5,040,000 - 3074400 = $ 1,965,600 = Total Equity

Projected balance sheet for Mumford Inc.,
Assets	Amount in $	Liabilities	Amount in $
Cash	100800	Current Debt	286650
Accounts receivable	262500	Long term debt	2787750
Inventory	210000
Total Current Assets	573300	Total Debt	3074400
Fixed Assets(Net of dep)	4466700	Stock Holder's Equity	1965600
		Total Stock Holder's Equity	1965600
Total Assets	5040000	Total Liabilities & Stockholder's	5040000

Pros & cons of forms of capital:

Interest bearing Debt Capital:

Pro's

• No dilution of Ownership
• Tax deduction for interest

Con's

• Liable for yearly Interest Payment
• Liabile to repay the Maturity amount

Issued common stock:

Pro's

• No liability for Yearly dividend
• No Liabilty for Maturity amount except in case of liquidation

Con's

• Dilution of Ownership
• No tax deduction for Dividend payment