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Problem 12-08 Financing Deficit Stevens Textile Corporation's 2016 financial statements are shown below: Balance Sheet as...

Problem 12-08
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 8%, 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.
    Total assets $
    AFN $
  2. What is the resulting total forecasted amount of the line of credit? Round your answer to the nearest dollar. Do not round intermediate calculations.
    Line of credit     $

  3. In your answers to Parts a and b, you should not have charged any interest on the additional debt added during 2017 because it was assumed that the new debt was added at the end of the year. But now suppose that the new debt is added throughout the year. Don't do any calculations, but how would this change the answers to parts a and b?
    If debt is added throughout the year rather than only at the end of the year, interest expense will be-Select-higherlowerItem 4 than in the projections of part a. This would cause net income to be -Select-higherlowerItem 5 , the addition to retained earnings to be -Select-higherlowerItem 6 , and the AFN to be -Select-higherlowerItem 7 . Thus, you would have to-Select-add insubtract fromItem 8 new debt.

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