Long-Term Financing Needed
At year-end 2016, Wallace Landscaping’s total assets were $1.4 million, and its accounts payable were $360,000. Sales, which in 2016 were $2.4 million, are expected to increase by 30% 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 $380,000 in 2016, and retained earnings were $245,000. Wallace has arranged to sell $170,000 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 7%, and 45% of earnings will be paid out as dividends.
Total Long term debt in 2016 = Total assets – Current Liabilities – Common Stock – Retained Earnings
= 1,400,000 – 360,000 – 380,000 – 245,000
Total Liabilities = Current Liabilities + Long term debt
b.AFN = (Total Assets – Current liabilities)*% increase in sales – New sales*profit margin*(1-payout ratio)
= (1,400,000-360,000)*30% - 2,400,000*130%*7%*(1-45%)
Long term debt = AFN – common stock issued
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