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Assets Liabilities & Owners’ Equity Cash $500,000 Accounts Payable 0 Accounts Receivable $550,000 Notes Payable $600,000 Inventory...

Assets Liabilities & Owners’ Equity

Cash $500,000 Accounts Payable 0

Accounts Receivable $550,000 Notes Payable $600,000

Inventory $750,000 Accruals $400,000

Total Current Assets $1,800,000 Total Current Liabilities 1,000,000

Net Plant & Equip $6,200,000 Long-Term Debt $4,000,000

Total Debt $5,000,000

Retained Earnings $1,500,000

Stockholders’ Equity $1,500,000

Total Equity 3,000,000

Total Assets $8,000,000 Total Liabilities & Owners’ Equity $8,000,000

You currently work for Capital One Financial. The firm is interested in pursuing a new banking project, but they are unsure of where and how to obtain the funds. The firm’s sales are currently $18,000,000. Sales are expected to increase by 7% with the new venture. The firm’s current profit margin is 27%, and firm currently retains 87% of its net income.

A. Use the attached balance sheet for Capital One Financial in Problem 4, plus the info above, to calculate the additional funds needed, if any, for the new project.

B. The firm is able to issue $4,000,000 in debt to fund the project. How much equity, if any, must the firm issue to fund the project? Make sure you show the steps associated with calculating your answer.

Solutions

Expert Solution

Current sales = $ 18,000,000

Expected growth rate this year =7%

Expected sales in this year, S = 18,000,000 x (1 + 7%) = $19,260,000

Net income = Profit margin x S = 27% x 19,260,000 = $ 5,200,200

Addition to retained earnings = Retention ratio x Net income = 87% x 5,200,200 = $ 4,524,174
-------------------

Part (a)

Retained Earnings in proforma balance sheet = opening balance of common equity + addition to retained earning during the current year = $ 1,500,000 + $ 4,524,174 = $ 6,024,174

You will see this figure in the pro forma balance sheet below.

Please see the table below for proforma balance sheet for the period ending this year.

The column at the end explains how each value has been calculated.

Parameter	$	How it has been calculated?
Cash	535,000	500000 x (1 + 7%)
[+] Account receivables	588,500	550000 x (1 + 7%)
[+] Inventory	802,500	750000 x (1 + 7%)
Total Current Assets	1,926,000	Sum of above items
[+] Fixed Assets	6,634,000	6200000 x (1 + 7%)
Total Assets	8,560,000	Total Current Assets [+] Fixed Assets

Accounts Payable	-	0 x (1 + 7%)
[+] Notes payable	600,000	Same as last year
[+ ]Accrued expenses	428,000	400000 x (1 + 7%)
Total Current Liabilities	1,028,000	Sum of above items
[+] Long term debt	4,000,000	Same as last year
[+] Retained Earnings	6,024,174	Explained above
[+] Shareholders' equity	1,500,000	Same as last year
Total equity	7,524,174
Total Liabilities and Equity before AFN	12,552,174	Total Current Liabilities [+] Long term debt [+] Total equity
[+] Additional funding needed	(3,992,174)	Balancing figure = Total assets - total liabilities & equity before AFN
Total Liabilities and Equity after AFN	8,560,000	Total Liabilities and Equity before AFN[+] Additional funding needed

Hence, AFN = - 3,992,174

This means there is a surplus, hence there will be no requirement of funds.

Part (b)

Since there is no requirement of external funds, hence there is no need for fresh equity issuance.

jeff jeffy answered 1 year ago

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