Question

Long-Term Financing Needed

At year-end 2016, Wallace Landscaping’s total assets were $1.6 million, and its accounts payable were $440,000. Sales, which in 2016 were $2.6 million, are expected to increase by 20% 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 $350,000 in 2016, and retained earnings were $235,000. Wallace has arranged to sell $65,000 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 8%, and 50% of earnings will be paid out as dividends.

1. What was Wallace's total long-term debt in 2016? Do not round intermediate calculations. Round your answer to the nearest dollar.
   $
   What were Wallace's total liabilities in 2016? Do not round intermediate calculations. Round your answer to the nearest dollar.
   $
   
2. 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.
   $

Answer 1

a). Total liabilities = Total Liabilities & Equity - Total Common Equity

= $1,600,000 - ($350,000 + $235,000) = $1,015,000

Total long term debt = Total liabilities - Total current liabilities

= $1,015,000 - $440,000 = $575,000

b). Sales2017 = Sales2016 * (1 + g) = $2,6 mil * 1.2 = $3.12 mil

Assets2017 = Assets2016 * (1 + g) = $1.6 mil * 1.2 = $1.92 mil

Change in Assets = $1.92 mil - $1.6 mil = $0.32 mil

Accounts payable2017 = Accounts payable2016 * (1 + g) = $440,000 * 1.2 = $528,000

Change in Accounts payable = $528,000 - $440,000 = $88,000

AFN = change in Assets - change in Accounts payable - [Sales * Profit margin * retention ratio]

AFN = $320,000 - $88,000 - [$3,120,000 * 0.08 * (1 - 0.5)] = $107,200

Additional debt needed = AFN - new equity = $107,200 - $65,000 = $42,200