Problem 12-8 Financing Deficit Stevens Textile\'s 2013 financial statements are
ID: 2754069 • Letter: P
Question
Problem 12-8 Financing Deficit Stevens Textile's 2013 financial statements are shown below: Balance Sheet as of December 31, 2013 (Thousands of Dollars) Cash $ 1,080 Accounts payable $ 4,320 Receivables 6,480 Accruals 2,880 Inventories 9,000 Line of credit 0 Total current assets $16,560 Notes payable 2,100 Net fixed assets 12,600 Total current liabilities $ 9,300 Mortgage bonds 3,500 Common stock 3,500 Retained earnings 12,860 Total assets $29,160 Total liabilities and equity $29,160 Income Statement for December 31, 2013 (Thousands of Dollars) Sales $36,000 Operating costs 32,440 Earnings before interest and taxes $ 3,560 Interest 460 Pre-tax earnings $ 3,100 Taxes (40%) 1,240 Net income $ 1,860 Dividends (45%) $ 837 Addition to retained earnings $ 1,023 Suppose 2014 sales are projected to increase by 10% over 2013 sales. Use the forecasted financial statement method to forecast a balance sheet and income statement for December 31, 2014. The interest rate on all debt is 8%, and cash earns no interest income. Assume that all additional debt in the form of a line of credit is added at the end of the year, which means that you should base the forecasted interest expense on the balance of debt at the beginning of the year. Use the forecasted income statement to determine the addition to retained earnings. Assume that the company was operating at full capacity in 2013, that it cannot sell off any of its fixed assets, and that any required financing will be borrowed as notes payable. Also, assume that assets, spontaneous liabilities, and operating costs are expected to increase by the same percentage as sales. Determine the additional funds needed. Round your answers to the nearest dollar. Do not round intermediate calculations. Total assets $ AFN $ What is the resulting total forecasted amount of the line of credit? Round your answer to the nearest dollar. Do not round intermediate calculations. Notes payable $ In your answers to Parts a and b, you should not have charged any interest on the additional debt added during 2014 because it was assumed that the new debt was added at the end of the year. But now suppose that the new debt is added throughout the year. Don't do any calculations, but how would this change the answers to parts a and b? If debt is added throughout the year rather than only at the end of the year, interest expense will be than in the projections of part a. This would cause net income to be , the addition to retained earnings to be , and the AFN to be . Thus, you would have to new debt.
Explanation / Answer
Answer:
Stevens Textiles
Pro Forma Income Statement
December 31, 2013
(Thousands of Dollars)
Forecast 2014
2013 Basis Pro Forma
Sales $36,000 1.10 $39,600
Operating costs 32,440 0.9011 35,684
EBIT $ 3,560 $ 3,916
Interest 460 460
EBT $ 3,100 $ 3,456
Taxes (40%) 1,240 1,382
Net income $ 1,860 $ 2,074
Dividends (45%) $ 837 $ 933
Addition to RE $ 1023 $ 1,141
Stevens Textiles
Pro Forma Balance Sheet
December 31, 2014
(Thousands of Dollars)
2014
Forecast Pro Forma
Basis ´ 2014 after
2013 2014 Sales Additions Pro Forma Financing Financing
Cash $ 1,080 0.03 $ 1,188 $ 1,188
Accounts receivable 6,480 0.18 7,128 7,128
Inventory 9,000 0.25 9,900 9,900
Total curr. assets $16,560 $18,216 $18,216
Fixed assets 12,600 0.35 13,860 13,860
Total assets $29,160 $32,076 $32,076
Accounts payable $ 4,320 0.12 $ 4,752 $ 4,752
Accruals 2,880 0.08 3,168 3,168
Notes payable 2,100 2,100 +1,055 3,155
Total current
liabilities $ 9,300 $10,020 $11,075
Mortagage-Bond 3,500 3,500 3,500
Total debt $12,800 $13,520 $14,575
Common stock 3,500 3,500 3,500
Retained earnings 12,860 1,141* 14,001 14,001
Total liabilities
and equity $29,160 $31,021 $32,076
AFN = $ 1,055
*From income statement.