Question

(12-8) 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 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

a. Suppose 2017 sales are projected to increase by 15% 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 10%, 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

notes payable. Also, assume that assets, spontaneous liabilities, and operating costs

are expected to increase by the same percentage as sales. Determine the additional

funds needed.

b. What is the resulting total forecasted amount of the line of credit?

Answer 1