At year-end 2016, Wallace Landscaping’s total assets were $1.9 million, and its accounts payable were $325,000....

At year-end 2016, Wallace Landscaping’s total assets were $1.9 million, and its accounts payable were $325,000. Sales, which in 2016 were $2.5 million, are expected to increase by 25% in 2017. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Wallace typically uses no current liabilities other than accounts payable. Common stock amounted to $455,000 in 2016, and retained earnings were $330,000. Wallace has arranged to sell $105,000 of new common stock in 2017 to meet some of its financing needs. The remainder of its financing needs will be met by issuing new long-term debt at the end of 2017. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its net profit margin on sales is 5%, and 35% of earnings will be paid out as dividends.

a. What was Wallace's total long-term debt in 2016? Do not round intermediate calculations. Round your answer to the nearest dollar.

b. What were Wallace's total liabilities in 2016? Do not round intermediate calculations. Round your answer to the nearest dollar.

c. How much new long-term debt financing will be needed in 2017? (Hint: AFN - New stock = New long-term debt.) Do not round intermediate calculations. Round your answer to the nearest dollar.

Expert Solution

Answer to Part a & b:

Total Assets = $1,900,000
Total Assets = Total Liabilities + Total Stockholders’ Equity
Total Stockholders’ Equity = Common Stock + Retained Earnings
Total Stockholders’ Equity = $455,000 + $330,000
Total Stockholders’ Equity = $785,000

Total Assets = Total Liabilities + Total Stockholders’ Equity
$1,900,000 = Total Liabilities + $785,000
Total Liabilities = $1,115,000

Total Liabilities = Accounts Payable + Long Term Debt
$1,115,000 = $325,000 + Long term Debt
Long Term Debt = $790,000

Answer to Part c:

Additional Fund Needed = Projected Increase in Assets – Spontaneous Increase in Liabilities – Increase in Retained Earnings
Projected Increased in Assets = $1,900,000 * 25% = $475,000
Spontaneous Increase in Liabilities = $325,000 * 25%= $81,250

Increase in Retained Earnings = Expected Sales * Profit Margin * Retention Ratio
Expected Sales = $2,500,000 + ($2,500,000 * 25%) = $3,125,000

Retention ratio = 1 – Dividend Payout Ratio
Retention ratio = 1 – 0.35 = 0.65

Increase in Retained Earnings = $3,125,000 * 0.05 * 0.65
Increase in Retained Earnings = $101,562.50

Additional Fund Needed = $475,000 - $81,250 - $101,562.50
Additional Fund Needed = $292.187.50 or $292,188

New Long Term Debt = Additional Fund Needed - New Stock
New Long Term Debt = $292,188 - $105,000
New Long Term Debt = $187,188

jeff jeffy answered 1 year ago

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At year-end 2016, Wallace Landscaping’s total assets were $1.9 million, and its accounts payable were $325,000....

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Expert Solution

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