Long-Term Financing Needed At year-end 2013; Wally Land-scaping’s total assets w
ID: 2654351 • Letter: L
Question
Long-Term Financing Needed
At year-end 2013; Wally Land-scaping’s total assets were $2.0 million and its accounts payable were $430,000. Sales, which in 2013 were $2.7 million, are expected to increase by 20% in 2014. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Wally typically uses no current liabilities other than accounts payable. Common stock amounted to $460,000 in 2013, and retained earnings were $225,000. Wally has arranged to sell $70,000 of new common stock in 2014 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 2014. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its profit margin on sales is 8%, and 50% of earnings will be paid out as dividends.
1A). What was Wally's total long-term debt in 2013? Round your answer to the nearest dollar.
1B) What were Wally's total liabilities in 2013? Round your answer to the nearest dollar.
2) How much new long-term debt financing will be needed in 2014? (Hint: AFN - New stock = New long-term debt.) Round your answer to the nearest dollar.
Explanation / Answer
1A) Total long-term debt in 2013 = 2,000,000 - 430,000 - 460,000 - 225,000 = $885,000
1B) Total Liabilities in 2013 = 885,000 + 430,000 = $1,315,000
2) 2014 Earnings after Dividend = (2,700,000 x 120% x 8%) x (1 - 0.5) = $129,600
2014 Total Assets = 2,000,000 x 120% = $2,400,000
2014 Accounts Payable = 430,000 x 120% = $516,000
2014 Total Equity = 460,000 + 225,000 + 70,000 + 129,600 = $884,600
2014 Total Capital Employed = 2,400,000 - 516,000 = $1,884,000
2014 debt requirement = 1,884,000 - 884,600 = $999,400
New Debt-financing needed = 999,400 - 885,000 = $114,400
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