At year-end 2015, Wallace Landscaping’s total assets were $1.4 million and its a
ID: 2617854 • Letter: A
Question
At year-end 2015, Wallace Landscaping’s total assets were $1.4 million and its accounts payable were $420,000. Sales, which in 2015 were $2.7 million, are expected to increase by 30% 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 $415,000 in 2015, and retained earnings were $205,000. Wallace has arranged to sell $55,000 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 4%, and 45% of earnings will be paid out as dividends.
What was Wallace's total long-term debt in 2015? Round your answer to the nearest dollar.
$ .......
What were Wallace's total liabilities in 2015? Round your answer to the nearest dollar.
$ .......
How much new long-term debt financing will be needed in 2016? (Hint: AFN - New stock = New long-term debt.) Round your answer to the nearest dollar. Do not round intermediate calculations.
$ .......
Explanation / Answer
1) Long term debt in 2015
Total liabilities = Total assets
or, Total liabilities = $1,400,000
or, Accounts payable + Long term debt + Retained earnings + Common stock = $1,400,000
or, $420,000 + Long term debt + $205,000 + $415,000 = $1,400,000
or, Long term debt = $360,000
2) Total liabilities in 2015
Total liabilities = Accounts payable + Long termd debt = $420,000 + $360,000 = $780,000
3) New long term debt needed
Total assets and accounts payable are proportional to sales, i.e., they will also increase by 30%.
total assets in 2016 = $1,400,000 x (1 + 0.30) = $1,820,000
accounts payable in 2016 = $420,000 x (1 + 0.30) = $546,000
Now, we need to compute the addition to retained earnings during 2016.
Sales in 2016 = $2,700,000 x (1 + 0.30) = $3,510,000
Addition to retained earnings = Sales in 2016 x net profit margin x (1 - dividend payout ratio)
or, Addition to retained earnings = $3,510,000 x 4% x (1 - 0.45) = $77,220
retained earnings in 2016 = $205,000 + $77,220 = $282,220
common stock in 2016 = $415,000 + $55,000 = $470,000
New long term debt in 2016 = Total assets - New accounts payable - New common stock - new retained earnings
or, long term debt in 2016 = $1,820,000 - $546,000 - $470,000 - $282,220 = $521,780
Addition or new long term financing needed = Long term debt in 2016 - Long term debt in 2015 = $521,780 - $360,000 = $161,780
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