Financing Deficit Stevens Textile\'s 2013 financial statements are shown below:
ID: 2635991 • Letter: F
Question
Financing Deficit
Stevens Textile's 2013 financial statements are shown below:
Balance Sheet as of December 31, 2013 (Thousands of Dollars)
Income Statement for December 31, 2013 (Thousands of Dollars)
Suppose 2014 sales are projected to increase by 20% over 2013 sales. Use the forecasted financial statement method to forecast a balance sheet and income statement for December 31, 2014. The interest rate on all debt is 9%, and cash earns no interest income. Assume that all additional debt in the form of a line of credit is added at the end of the year, which means that you should base the forecasted interest expense on the balance of debt at the beginning of the year. Use the forecasted income statement to determine the addition to retained earnings. Assume that the company was operating at full capacity in 2013, that it cannot sell off any of its fixed assets, and that any required financing will be borrowed as notes payable. Also, assume that assets, spontaneous liabilities, and operating costs are expected to increase by the same percentage as sales. Determine the additional funds needed. Round your answers to the nearest dollar. Do not round intermediate calculations.
What is the resulting total forecasted amount of the line of credit? Round your answer to the nearest dollar. Do not round intermediate calculations.
Notes payable $
Explanation / Answer
Partial Pro-Forma
S1= S0 (1 + g) = $36,000 (1 + .20) = $43,200
where
Percentage of Sales Calculations
Cash
Cash/Sales = $ 1,080/ $36,000= 0.03= 3%
Inventory
Inventory/Sales = $9,000/$ 36,000 = 0.25 = 25%
Accounts Payable
(Accounts Payable)/Sales = $ 4,320/$36,000 = 0.12 = 12%
Operating Costs
Operating Costs/Sales =$ 32,440/$ 36,000 =0 .90 = 90%
Taxes
Taxes/(Taxable Income) = $1,240/$$ 3,100 = 0.4 = 40%
Net Income
(Net Income)/Sales = $1,860/$36,000 = 0.05 = 5% = $1922
Dividends
Dividends/(Net Income) = $837/$1,860 = 0.45 = 45%
Addition to Retained Earnings Addition to Retained Earnings/ (Net Income) = $ 1,023//$1,860 = 0.55 =55%
Accounts receivable (Accounts receivable)/Sales = $6,480/$36,000 = 0.18 =18%
Net fixed assets: Net fixed assets/ Total current assets = $12,600/$16,560 = 76%
Accruals: Accruals/ Sales = $2,880/ $36,000 = 0.08 = 8%
Partial Pro-Forma Calculations:
Cash:
(Cash%)(Sales Forecast) = (3%)($43,200) = $1,296
Inventory:
(Inventory%)(Sales Forecast) = 25%($43,200) = $10,800
Operating Costs:
(Operating Costs%)(Sales Forecast) = 90%($43200) = $38,880
Addition to Retained Earnings: (Addition to Retained Earnings %)( Net Income Forecast)
= 55 % ($1922) = $1,058
Retained Earnings: Retained Earnings + Addition to Retained Earnings Forecast
= $12,860 + $1,058 = $13,918
Balance Sheet as of December 31, 2013 and December 31, 2014 (Thousands of Dollars)
Cash
$ 1,080
$1,296
Accounts payable
$ 4,320
$4,838
Receivables
$6,480
$7,646
Accruals
$2,880
$3,110
Inventories
$9,000
$10,800
Line of credit
0
($3,592)
Total current assets
$16,560
$19,742
Notes payable
$2,100
$2,289
Net fixed assets
$12,600
$15,004
Total current liabilities
$ 9,300
$10,237
Mortgage bonds
$3,500
$3,500
Common stock
$3,500
$3,500
Retained earnings
$12,860
$13,917
Total assets
$29,160
$34,746
Total liabilities and equity
$29,160
$31,154
Sales
$36,000
$43,200
Operating costs
$32,440
$38,880
Earnings before interest and taxes
$ 3,560
$4,320
Interest
$460
$506
Pre-tax earnings
$ 3,100
$3,814
Taxes (40%)
$1,240
$1,526
Net income
$ 1,860
$2,288
Dividends (45%)
$ 837
$1,030
Addition to retained earnings
$ 1,023
$1,058
EFN = $34,746 - $31,154 = $3,592
Total assets
$ 34,746
AFN
$3,592
Cash
Cash/Sales = $ 1,080/ $36,000= 0.03= 3%
Inventory
Inventory/Sales = $9,000/$ 36,000 = 0.25 = 25%
Accounts Payable
(Accounts Payable)/Sales = $ 4,320/$36,000 = 0.12 = 12%
Operating Costs
Operating Costs/Sales =$ 32,440/$ 36,000 =0 .90 = 90%
Taxes
Taxes/(Taxable Income) = $1,240/$$ 3,100 = 0.4 = 40%
Net Income
(Net Income)/Sales = $1,860/$36,000 = 0.05 = 5% = $1922
Dividends
Dividends/(Net Income) = $837/$1,860 = 0.45 = 45%
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