MINDTAP Chapter 9 EOC PROBLEMSGRADED 96 Additional Funds Nee

MINDTAP Chapter 9- EOC PROBLEMS-GRADED 9-6: Additional Funds Needed (AFN) Equation Method Problem 9-8 Financing Deficit Stevens Textile\'s 2015 financial statements are shown below: Balance Sheet as of December 31, 2015 (Thousands of Dollars) Cash 1,080 Accounts payable 6,480 Accruals 9,000 Line of credit 4,320 2,880 Inventories 2,100 $9,300 3,500 3,500 12,860 $29,160 Total current assets $16,560 Notes payable Total current liabilities Mortgage bonds Common stock Retained earnings Net fixed assets 12,600 $29,160 Total liabilities and equity Total assets Income Statement for December 31, 2015 (Thousands of Dollars) Sales Operating costs $36,000 32,440 3,560 460 3,100 1,240 $1,860 837 $1,023 Earnings before interest and taxes Pre-tax earnings Taxes (40%) Net income Dividends (45%) Addition to retained earnings a. Suppose 2016 sales are protected to increase bv 20% over 201S sales. Use the forecasted financial statement - F6 FS

Solution

Income statement for December 31,2015 (Thousands of dollars) 2015 Forecast Basis 2016 Sales $36,000 1.20*Sales $43,200.0 Operating Costs -32440 32440/36000*43200 -38928 Earnings before interest and taxes $3,560 $4,272.0 Interest -460 11% of 5600 -616 Pre-tax earnings $3,100 $3,656.0 Taxes (40%) ($1,240) ($1,462.40) Net Income $1,860 $2,193.6 Dividends(45%) $837 $987.12 Addition to retained earnings $1,023 $1,206.48 Balance Sheet as of December 31, 2015 Forecast Basis % Pro forma after 2015 2016 Sales Additions Pro Forma Financing Financing Cash $1,080 1080/36000 1296 1296 Receivables 6480 6480/36000 7776 7776 Inventories 9000 9000/36000 10800 10800 Total Current assets $16,560 19872 19872 Net Fixed assets 12600 12600/36000 15120 15120 Total Assets $29,160 34992 34992 Accounts payable $4,320 4320/36000 5184 5184 Accruals 2880 2880/36000 3456 3456 Line of Credit 0 3186 3186 Notes payable 2100 2100 2100 Total Current Liabilities $9,300 10740 10740 Mortgage Bonds 3500 3500 3500 Common stock 3500 3500 3500 Retained earnings 12860 12860+1206 14066 14066 Total Liabilities and equity $29,160 31806 31806 Total Assets $31,806 AFN $3,186 Additional financing required 34992-31806 3186 Total debt of 2015 was 2100+3500 = 5600 b) Line of credit is $3186 c) Interest expense will be 5600+3186 8786 8786*11% 966.46 Interest expense would be more than the projections in a. This would cause net income to be reduced, the addition to retained earnings to be less and the AFN to be reduced. Thus, the new debt Net income would be 4272-966 3306 1322.4 Net income 1983.6 892.62 Retained earnings would be 1090.98 AFN required would be 34992-10740-3500-3500-(12860+1091) 3301