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eBook Problem Walk-Through At year-end 2019, total assets for Arrington Inc. were $1.8 million and accounts...

eBook Problem Walk-Through At year-end 2019, total assets for Arrington Inc. were $1.8 million and accounts payable were $340,000. Sales, which in 2019 were $2.00 million, are expected to increase by 20% in 2020. Total assets and accounts payable are proportional to sales, and that relationship will be maintained; that is, they will grow at the same rate as sales. Arrington typically uses no current liabilities other than accounts payable. Common stock amounted to $435,000 in 2019, and retained earnings were $265,000. Arrington plans to sell new common stock in the amount of $125,000. The firm's profit margin on sales is 8%; 55% of earnings will be retained. What were Arrington's total liabilities in 2019? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Round your answer to the nearest cent. $ How much new long-term debt financing will be needed in 2020? (Hint: AFN - New stock = New long-term debt.) Write out your answer completely. For example, 25 million should be entered as 25,000,000. Do not round intermediate calculations. Round your answer to the nearest cent.

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Expert Solution

At year-end 2019,

Total assets for Arrington Inc. = $1.8 million

Accounts payable were $340,000.

Sales, which in 2019 were $2.00 million, are expected to increase by 20% in 2020.

Common stock amounted to $435,000 in 2019,

Retained earnings were $265,000.

What were Arrington's total liabilities in 2019?

Total Liability = Total Assets - Common stock – retained Earnings

= $ 18,00,000 - $435,000 - $265,000

= $ 11,00,000

For year 2020

[Total assets and accounts payable are proportional to sales, and that relationship will be maintained; that is, they will grow at the same rate as sales.]

Sales in 2020 = $ 2.00 million x 120% = $ 2.40 million

Total assets for Arrington Inc. = $ 2.40 million x ($1.8 million / $2.00 million)

= $ 21,60,000

Accounts payable = $ 2.40 million x ($3,40,000 / $2.00 million)

= $4,08,000

The firm's profit margin on sales is 8%; 55% of earnings will be retained

Net profit = Sales in 2020 x 8% = $ 2.40 million x 8% = $1,92,000

Retained Earnings = $1,92,000 x 55% = $ 1,05,600

Arrington plans to sell new common stock in the amount of $125,000.

Total Liability = Total Assets - Common stock – retained Earnings

= $ 21,60,000 – ($435000+$125000) – ($265,000+$1,05,600)

= $ 21,60,000 – $5,60,000 - $3,70,600

= $12,29,400

How much new long-term debt financing will be needed in 2020?

(Hint: AFN - New stock = New long-term debt.)

AFN = Projected increase in assets – spontaneous increase in liabilities – any increase in retained

earnings

Projected increase in assets = $ 21,60,000 - $ 18,00,000 = $ 3,60,000

Spontaneous increase in liabilities = $12,29,400 - $ 11,00,000 = $ 1,29,400

Increase in retained earnings = $1,05,600

AFN = $ 3,60,000 - $ 1,29,400 - $1,05,600 = $ 1,25,000

New long-term debt = AFN - New stock

= $ 1,25,000 - $125000

= Nil

Since the additional fund needed is funded completely by new stocks issue no need of New Long term debt.

jeff jeffy answered 1 year ago

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