LONG-TERM FINANCING NEEDED At year-end 2016, total assets for Arrington Inc. wer
ID: 1170528 • Letter: L
Question
LONG-TERM FINANCING NEEDED
At year-end 2016, total assets for Arrington Inc. were $1.5 million and accounts payable were $325,000. Sales, which in 2016 were $2.3 million, are expected to increase by 30% in 2017. Total assets and accounts payable are proportional to sales, and that relationship will be maintained; that is, they will grow at the same rate as sales. Arrington typically uses no current liabilities other than accounts payable. Common stock amounted to $350,000 in 2016, and retained earnings were $215,000. Arrington plans to sell new common stock in the amount of $115,000. The firm's profit margin on sales is 6%; 45% of earnings will be retained.
What were Arrington's total liabilities in 2016? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Round your answer to the nearest cent.
$ __________
How much new long-term debt financing will be needed in 2017? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Do not round your intermediate calculations. Round your answer to the nearest cent. (Hint: AFN - New stock = New long-term debt.)
$ __________
Explanation / Answer
Part 1 Total Assets = Current liabilities + Long term debt + Common stock + Retained earnings $ 1,500,000 = 325000 + Long term debt + 350000 + 215000 $ 1,500,000 = 890000 + Long term debt Long term debt = 1500000-890000 $ 610,000 Total liabilities = Accounts payable + long term debt 325000+610000 $ 935,000 part 2 Sales(2016) = $ 2,300,000 Add: 30% growth = $ 690,000 Total sales(2017) = $ 2,990,000 Profit margin at 6% = 179,400 Retention at 45% = $ 80,730 Addition to retained earnings Total assets(2016) = 1,500,000 Accounts payable(2016) = 325,000 Add: 30% growth = 450,000 Add: 30% growth = 97,500 Total assets(2017 = 1,950,000 Accounts payable(2017) = 422,500 Common stock(2016) = 350,000 Retained earnings(2016) = 215,000 Add: New issued = 115,000 Add: addition to RE = 80,730 Common stock(2017) = 465,000 Retained earnings(2017) = 295,730 Total Assets = Current liabilities + Long term debt + Common stock + Retained earnings $ 1,950,000 = 422500 + Long term debt + 465000 + 295730 $ 1,950,000 = 1183230 + Long term debt Long term debt = 1950000-1183230 $ 766,770 AFN = 2017 debt - 2016 debt 766770-610000 $ 156,770
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