At year-end 2014, total assets for Ambrose Inc. were $1.6 million and accounts p
ID: 2721835 • Letter: A
Question
At year-end 2014, total assets for Ambrose Inc. were $1.6 million and accounts payable were $345,000. Sales, which in 2014 were $2.3 million, are expected to increase by 20% in 2015. 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 $455,000 in 2014, and retained earnings were $285,000. Ambrose plans to sell new common stock in the amount of $110,000. The firm's profit margin on sales is 4%; 70% of earnings will be retained.
How much new long-term debt financing will be needed in 2015?
Explanation / Answer
Current long term debt = Total Assets - Current Common Stock - Current Accounts Payable
=> $1,600,000 - $455,000 - $345,000 = $8,000,000
Accounts Payable to sales ratio = $345,000/$2,300,000 = 0.15 or 15%
Assets to sales ratio = $1,600,000/$2,300,000 = 0.6956 or 69.56%
Retained Earnings in 2014 = ($2,300,000 x 0.04) x 0.7 = $64,400
Expected Sales in 2015 = $2,300,000 x 1.20 = $2,760,000
New Accounts Payable = $2,760,000 x 15% = $414,000
New Assets = $2,760,000 x 69.56% = $1,919,856
Total Assets in 2015 = Current Stock + New Stock + Retained Earnings + Current Long term debt + New Long term debt + New Accounts payable
$1,919,856 = $455,000 + $110,000 + $64,400 + $8,000,000 + New Long term debt + $414,000
New long term debt financing = $1,919,856 - $455,000 + $110,000 + $64,400 + $8,000,000 + $414,000
=$7,123,544
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