Question

At year-end 2015, Wallace Landscaping’s total assets were $1.9 million and its accounts payable were $435,000....

At year-end 2015, Wallace Landscaping’s total assets were $1.9 million and its accounts payable were $435,000. Sales, which in 2015 were $2.5 million, are expected to increase by 20% in 2016. 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 $465,000 in 2015, and retained earnings were $300,000. Wallace has arranged to sell $80,000 of new common stock in 2016 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 2016. (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.

How much new long-term debt financing will be needed in 2016? (Hint: AFN - New stock = New long-term debt.) Do not round intermediate calculations. Round your answer to the nearest dollar.

Homework Answers

Answer #1
Sales (2500000*(1+20%))    3,000,000
Multiply: net profit margin 5%
Net profit       150,000
Less: Dividends (150000*35%)          52,500
Increase in retained earnings          97,500
Increase in total assets (19000000*20%)       380,000
Less: Increase in accounts payable (435000*20%)          87,000
Less: Increase in retained earnings          97,500
Additional fund needed (AFN)       195,500
Less: New stock issued          80,000
New long term debt issued       115,500
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