Jackson Co. has the following balance sheet as of December 31, 2001. Assets: Cla
ID: 2725486 • Letter: J
Question
Jackson Co. has the following balance sheet as of December 31, 2001.
Assets:
Claims:
Current assets
$ 600,000
Accounts payable
$ 100,000
Fixes assets
400,000
Accruals
100,000
Notes payable
100,000
Long-term debt
300,000
___________
Total common equity
400,000
Total assets
$1,000,000
Total claims
$1,000,000
In 2001, the company reported sales of $5 million, net income of $100,000, and dividends of $60,000. The company anticipates its sales will increase 20 percent in 2002 and its dividend payout will remain at 60 percent. Assume the company is at full capacity, so its assets and spontaneous liabilities will increase proportionately with the increase in sales.
Assume the company uses the AFN formula and all additional funds needed (AFN) will come from issuing new long term debt. Given its forecast, how much long-term debt will the company have to issue in 2002? Show work
Assets:
Claims:
Current assets
$ 600,000
Accounts payable
$ 100,000
Fixes assets
400,000
Accruals
100,000
Notes payable
100,000
Long-term debt
300,000
___________
Total common equity
400,000
Total assets
$1,000,000
Total claims
$1,000,000
Explanation / Answer
Additional Funds Needed = [A0 x S] – [L0 x S] – [S1 x PM x b]
Where,
Ao = current level of assets
S = percentage increase in sales i.e. change in sales divided by current sales
Lo = current level of liabilities
S1 = new level of sales
PM = profit margin
b = retention rate = 1 – payout rate
= > [$1,000,000 x 20%] – [$600,000 x 20%] – [($5,000,000 x 1.20) x ($100,000/$5,000,000) x (1-60%)]
= $128,000
Long term debt in current debt structure = $300,000/$600,000 = 50%
Increase in liabilities = $600,000 x 20% = $120,000
Increase required in long term debt = $120,000 x 50% = $60,000
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