year-end 2008, total assets for Ambrose Inc. were $1.2 million and accounts paya

Question

year-end 2008, total assets for Ambrose Inc. were $1.2 million and accounts payable were $375,000. Sales, which in 2008 were $2.5 million, are expected to increase by 25% in 2009. 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. Ambrose typically uses no current liabilities other than accounts payable. Common stock amounted to $425,000 in 2008, and retained earnings were $295,000. Ambrose plans to sell new common stock in the amount of $75,000. The firm

Explanation / Answer

a)total liabilities and equity=accnts payble+ long term debt + common stock +retained earning $1,200,000 = $375,000 + Long-term debt + $425,000 + $295,000 Long-term debt = $105,000. Total debt = Accounts payable + Long-term debt = $375,000 + $105,000 = $480,000. Alternatively, Total debt =total liabilities - Common stock - Retained earnings and equity = $1,200,000 - $425,000 - $295,000 = $480,000 b) Assets/Sales (A*/S) = $1,200,000/$2,500,000 = 48%. L*/Sales = $375,000/$2,500,000 = 15%. 2006 Sales = (1.25)($2,500,000) = $3,125,000. AFN = (A*/S)(?S) - (L*/S)(?S) - MS1(1 - d) - New common stock = (0.48)($625,000) - (0.15)($625,000) - (0.06)($3,125,000)(0.6) - $75,000 = $300,000 - $93,750 - $112,500 - $75,000 = $18,750. Given in problem that firm will sell new common stock = $75,000. **PM = 6%; Payout = 60%; NI2008 = $2,500,000 x 1.25 x 0.06 = $187,500. Addition to RE = NI x (1 - Payout) = $187,500 x 0.4 = $75000

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