Question

Financing Deficit

Stevens Textile Corporation's 2016 financial statements are shown below:

Balance Sheet as of December 31, 2016 (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, 2016 (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 2017 sales are projected to increase by 20% over 2016 sales. Use the forecasted financial statement method to forecast a balance sheet and income statement for December 31, 2017. The interest rate on all debt is 7%, 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 2016, that it cannot sell off any of its fixed assets, and that any required financing will be borrowed as a line of credit. Also, assume that assets, spontaneous liabilities, and operating costs are expected to increase by the same percentage as sales. Determine the additional funds needed. Round your answers to the nearest dollar. Do not round intermediate calculations.

1. What is the AFN? Please provide a detailed calculation of the AFN. I keep getting the wrong answer.  

2. What is the resulting total forecasted amount of the line of agreement?

The correct answer for 1 & 2 is $3112.

Answer 1

Income Statement for January 1 - December 31, 2016 ($ '000s )
Sales	36000	36000*1.2=	43200
Operating costs	32440	32440*1.2=	38928
Earnings before interest and taxes	3560	43200-38928=	4272
Interest	460	(2100+3500)*7%=	392
Pre-tax earnings	3100	4272-392=	3880
Taxes (40%)	1240	3880*40%=	1552
Net income	1860	3880-1552=	2328
Dividends (45%)	837	837/1860*2328=	1048
Addition to retained earnings	1023	1023/1860*2328=	1280

Balance Sheet as of December 31, 2016 ($ 000s)
		Forecast for Dec 31, 2017				Forecast for Dec 31, 2017
Cash	1080	1080*1.2=	1296	Accounts payable	4320	4320*1.2=	5184
Receivables	6480	6480*1.2=	7776	Accruals	2880	2880*1.2=	3456
Inventories	9000	9000*1.2=	10800	Line of credit(Bal.fig.)	0		3112
Total current assets	16560		19872	Notes payable	2100	Same	2100
Net fixed assets	12600	12600*1.2=	15120	Total current liabilities	9300		13852
				Mortgage bonds	3500	Same	3500
				Common stock	3500	Same	3500
				Retained earnings	12860	12860+1280=	14140
				Total liabilities and equity	29160		34992
Total assets	29160		34992	Total of the assets side			34992
		Line of credit calculation: 34992-5184-3456-2100-3500-3500-14140= 3112
So, the Answer :
Forecasted Line of credit arrangement required = $ 3112

Verification with Formula:

Additional Financing required=Forecasted increase in assets-Spontaneous increase in Liabilities-Increase in Retained earnings

ie.(29160*0.20)-((4320+2880)*0.2)-1280=

3112