Baldwin Products Company anticipates reaching a sales level of $6 million in one

Question

Baldwin Products Company anticipates reaching a sales level of $6 million in one year. The company expects earning after taxes during the next year to equal $400,000. During the past several years, the company has been paying $50,000 in dividends to its stockholders. The company expects to continue this policy for at least the next year. The actual balance sheet and income statement for Baldwin during 2013 follow:

Balance Sheet

Cash - 200,000                                                        Acct payable - 600,000

Acct Receivable - 400,000                                        Notes payable - 500,000

Inventories - 1,200,000                                             Long-term debt - 200,000

Fixed assets, net - 500,000                                     Stockholders' equity - 1,000,000

Total assets - 2,300,000                                              Total Liabilities and equity - 2,300,000

A- Using the percentage of sales method, calculate the additional financing Baldwin Products will need over the next year at the $6 million sales level. Show the pro forma balance sheet for the company as of December 31, 2014, assuming that a sales level of $6 million is reached. Assume that the additional financing needed is obtained in the form of additional notes payable.

B- Suppose that the Baldwin Products' management feels that the average collection period on its additional sales - that is, sales over $4 million--will be 60 days, instead of the current level. By what amount will this increase in the average collection period increase the financing needed by the company over the next year?

C - Uf the Baldwin Products' banker requires the company to maintain a current ratio equal to 1.6 or greater, what is the maximum amount of additional financing that can be in the form of bank borrowings (notes payable)? What other potential sources of financing are available to the company?

Explanation / Answer

Hi there,

Ans A) The increase in sales = (6-4)/4=50%

The increase in total assets is 2,300,000X50%=1,150,000

Change in spontaneous liabilities = 600,000X50%=300,000

Change in retained earnings = 400,000-50,000=350,000

Additional finance = 1,150,000-300,000-350,000=$500,000

Balance Sheet proforma:

2700000

750000

3450000

The notes payable is the balancing figure and is increased by $500,000 to balance the proforma balance sheet.

Ans B) The current average collection period is 400,000/(4,000,000/365) = 36.5 days. At the new level the receivables are 600,000. If in 60 days,the additional sales is to be collected, the total receivables would be 400,000 + 2,000,000/365 X 60 = 728,767. The change in financing is 728,767-600,000=$128,767.

Ans C) The total current assets are 2,700,000. With a current ratio of 1.6, the total current liabilities can be 2,700,000/1.6 = 1,687,500. The accounts payable are 900,000, so the total notes payable can be 1,687,000-900,000 = 787,500.

The remaining financing can be from long term debt or equity.

Kindly rate my answer and give feedback in the comments section.

Cheers!!

Items as percentage of sales 2013 2014 Cash (5%) 200000 300000 Receivables (10%) 400000 600000 Inventories (30%) 1200000 1800000 Total Current Assets 1800000

2700000

Net Fixed Assets(12.5%) 500000

750000

Total Assets 2300000

3450000

Accounts payable (15%) 600000 900000 Notes Payable 500000 1000000 Total Current liabilites 1100000 1900000 Long term Debt 200000 200000 Stockholder's Equity 1000000 1350000 Total liability and equity 2300000 3450000

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