Problem 12-05 Long-Term Financing Needed At year-end 2016, Wallace Landscaping’s
ID: 2789459 • Letter: P
Question
Problem 12-05
Long-Term Financing Needed
At year-end 2016, Wallace Landscaping’s total assets were $1.7 million, and its accounts payable were $450,000. Sales, which in 2016 were $2.6 million, are expected to increase by 30% in 2017. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Wallace typically uses no current liabilities other than accounts payable. Common stock amounted to $350,000 in 2016, and retained earnings were $320,000. Wallace has arranged to sell $145,000 of new common stock in 2017 to meet some of its financing needs. The remainder of its financing needs will be met by issuing new long-term debt at the end of 2017. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its net profit margin on sales is 7%, and 50% of earnings will be paid out as dividends.
A.) What was Wallace's total long-term debt in 2016? Do not round intermediate calculations. Round your answer to the nearest dollar.
$ 580,000 - correct & verified
B.) What were Wallace's total liabilities in 2016? Do not round intermediate calculations. Round your answer to the nearest dollar.
$ 1,030,000 - correct & verified
C.) How much new long-term debt financing will be needed in 2017? (Hint: AFN - New stock = New long-term debt.) Do not round intermediate calculations. Round your answer to the nearest dollar.
$ ___________________
Explanation / Answer
Total Assets / Sales = $1,700,000 / $2,600,000 = 17/ 26
Accoutns payables / Sales = $450,000 / $2,600,000 = 45/260 or 9 / 52
The above ratio will be maintained in 2017.
Sales in 2017 = $2,600,000 + 30% = $3,380,000
Total Assets in 2017 = $3,380,000 x 17 / 26 = $2,210,000
Accounts payable in 2017 = $3,380,000 x 9 / 52 = $585,000
Net Profit in 2017 = 7% x $3,380,000 = $236,600
50% of the net profit will be distributed or in other words, 50% of the net profit will be retained.
Retained earnings in 2017 = $320,000 + 50% x $236,600 = $438,300
New common Equity in 2017 = $350,000 + $145,000 = $495,000
Now, that we have all the information from the question, we compute the long-term debt required.
Total Assets/ Total Liabilities = Common Equity + Retained Earnings + Long Term Debt + Accounts Payable
Or, $2,210,000 = $495,000 + $438,300 + Long Term Debt + $585,000
Or, Long term Debt in 2017 = $691,700
New Long term debt = Total Long Term Debt in 2017 - Existing Debt = $691,700 - $580,000 = $111,700