ng-Term Financing Needed At year-end 2016, Wallace Landscaping’s total assets we
ID: 2560201 • Letter: N
Question
ng-Term Financing Needed At year-end 2016, Wallace Landscaping’s total assets were $1.6 million, and its accounts payable were $330,000. Sales, which in 2016 were $3.0 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 $420,000 in 2016, and retained earnings were $350,000. Wallace has arranged to sell $100,000 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 40% of earnings will be paid out as dividends. What was Wallace's total long-term debt in 2016? Do not round intermediate calculations. Round your answer to the nearest dollar. $ 500,000 What were Wallace's total liabilities in 2016? Do not round intermediate calculations. Round your answer to the nearest dollar. $ 830,000 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. $ 41,799,200 Hide Feedback Partially Correct
Explanation / Answer
(i) Calculation of long-term debt in 2016
Total assets = (Shareholder Fund) + (Total Liabilities)
Total assets =(Common Stock + Retained earnings) + Total Liabilities
1,600,000 = ($420,000 + $350,000) + Total Liabilities
Therefore, Total Liabilities = $830,000
Total Liabilities = Long term debts + current liabilities
$830,000 = Long term debts + $330,000
Therefore, long term debts for 2016 = $500,000
(ii) Calculation of total liabilities in 2016
Total Liabilities = Long-term debts + current liabilities
Total Liabilities = $500,000 + $330,000
Therefore, Total Liabilities are $830,000
(iii) Long-term financing requirement in 2017
Sales in 2017 = Sales od 2016 * 130%
= $3,000,000 * 130%
= $3,900,000
Amount retained in 2017 = 60% of profit for 2017
Amount retained in 2017 = 60% * Profi for 2017
Amount retained in 2017 = 60% * (7% of Sales of 2017)
Amount retained in 2017 = 60% * 7% * $3,900,000
Amount retained in 2017 = $163,800
Total retained earnings = Retained earnings in 2016 + Reatined earnings in 2017
Total retained earnings = $350,000 + $163,800
Total retained earning = $513,800
Total Assets in 2017 = 130% of total assets in 2016
Total Assets in 2017 = 130% * $1,600,000
Total Assets in 2017 = $2,080,000
Common stock in 2017 = Common stock in 2016 + New issue
Common stock in 2017 = $420,000 +$100,000 = $520,000
Current liabilities in 2017 = Current liabilities in 2016 * 130%
Current liabilities in 2017 = $330,000 * 130%
Current liabilities in 2017 = $429,000
Therefore,
Long-term debt in 2017 = Total assets - common stock - retained earnimmmmx ngs - current liabilty
Long-term debt in 2017 = $2,080,000 - $520,000 - $513,800 - 429,000
Long-term debt in 2017 = $617,200
So, new long term debt in 2017 = $617,200 - $500,000 = $117,200
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