Question

The firm is generating its proforma balance sheet for 2016. For the year 2015, sales were $4 million. Sales are expected to be $5 million in 2016. The company expects its net profit margin for 2016 to equal 5%. In each of the past several years, the company has been paying $50,000 in dividends to its stockholders. The company wants to increase dividends to $80,000 in 2016. The 2015 balance sheet for the company is below. Assume that Cash, Accounts Receivable, Inventories, and Accounts Payable vary directly with sales. Net Fixed Assets must increase by $175,000 to support the sales expansion. Any additional financing that Pioneer will need for 2016 will come from new long-term debt, but the company has a covenant that states that their ratio of total debt to total assets may not exceed 45%. How much additional financing will the company need? Can they pay the increased dividend, increase their long-term debt, and still satisfy the covenant? Show numbers to support your answer.

2015 BALANCE SHEET

CASH	100,000	ACCOUNTS PAYABLE	600,00
ACCOUNTS RECEIVABLE	400,000	NOTES PAYABLE	400,00
INVENTORIES	1,200,000	LONG TERM DEBT	200,00
NET FIXED ASSET	500,000	STOCKHOLDERS' EQUITY	1,000,000
TOTAL ASSET	2,200,000	TOTAL LIABILITIES & EQUITY	2,200,000

Answer 1

Balance sheet
2015
Assets	Amount	Liability & Equity	Amount
Cash	100000	Account payable	600000
Account receivable	400000	Note Payable	400000
Inventories	1200000	Long Term Debt	200000
Net Fixed Assets	500000	Stockholders Equity	1000000
Total Assets	2200000	Total Liability & Equity	2200000
It is important to mention here that normally Accounts payable and Notes Payble are part of short term debt in that case company is not matching the crieteria of 45% covenant in even year 2015
				Total Assets (Cash, A/c Receivable,Inventory, NFA)			2200000
Total Debt (A/c Payble, Note payable, Long Term Debt)			1200000
% of Total Debt to Total Assets			55%
It shows that company is considering only amount borrowd as debt , in that case Account payable would not part of Total Debt
Total Assets (Cash, A/c Receivable,Inventory, NFA)			2200000
Total Debt (Note payable, Long Term Debt)			600000
% of Total Debt to Total Assets			27%
		2015	2016
Sales		4000000	5000000
Net profit Margin	5% of sales	200000	250000
Dividend		50000	80000
Ratio of 2015
Cash	100000	Sales	4000000
Account receivable	400000	Sales	4000000
Inventories	1200000	Sales	4000000
Account payable	600000	Sales	4000000
Cash To Sales			2.50%
Account receivableTo Sales			10.00%
InventoriesTo Sales			30.00%
Account payable To Sales			15.00%
Ratio of 2016 would be same as 2015 with sales
Cash To Sales			2.50%
Account receivableTo Sales			10.00%
InventoriesTo Sales			30.00%
Account payable To Sales			15.00%
Cash	125000	Sales	5000000
Account receivable	500000	Sales	5000000
Inventories	1500000	Sales	5000000
Account payable	750000	Sales	5000000
Net fixed assets of 2015			5,00,000.00
Increase in 2016			1,75,000.00
Total			6,75,000.00
Balance sheet
2016
Cash	125000	Account payable	750000
Account receivable	500000	Note Payable	400000
Inventories	1500000	Long Term Debt	200000
Net Fixed Assets	6,75,000	Stockholders Equity	1000000
Total Assets	2800000	Total Liability & Equity	2350000
As it can be seen that if All derived figures make a Balance Sheet assuming that this is situation after payment of dividend there is imbalance in Asset side and "Equity & Liabilities" side. i.e (2800000-2350000=450000)
				This shortage balancing figure would be met from long term borrowing. It means additional funding of 450000 would be required.
Balance sheet
2016
Cash	125000	Account payable	750000
Account receivable	500000	Note Payable	400000
Inventories	1500000	Long Term Debt	650000
Net Fixed Assets	675000	Stockholders Equity	1000000
Total Assets	2800000	Total Liability & Equity	2800000
Total Debt (notes payable +long Term debt)			1050000
			38%
Additional fund	Long term debt of 2015		200000
	Long term debt of 2016		650000
	Additional funding required		450000