Problem 12-08 Financing Deficit Stevens Textile Corporation\'s 2016 financial st

Question

Problem 12-08
Financing Deficit

Stevens Textile Corporation's 2016 financial statements are shown below:

Balance Sheet as of December 31, 2016 (Thousands of Dollars)

Income Statement for January 1 - December 31, 2016 (Thousands of Dollars)

Suppose 2017 sales are projected to increase by 20% over 2016 sales. Use the forecasted financial statement method to forecast a balance sheet and income statement for December 31, 2017. The interest rate on all debt is 11%, 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 2016, that it cannot sell off any of its fixed assets, and that any required financing will be borrowed as a line of credit. 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.

What is the resulting total forecasted amount of notes payable? Round your answer to the nearest dollar. Do not round intermediate calculations.
Notes payable     $

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

Explanation / Answer

Solution:

Determining the Additional Funds Needed:

Stevens Textiles

Pro Forma Income Statement

December 31, 2017

Stevens Textiles

Pro Forma Balance Sheet

December 31, 2017

The Total Forecasted Amount of Notes Payable is $5,285.

Therefore. the Additional Funds Needed is $3,185.

Stevens Textiles

Pro Forma Income Statement

December 31, 2017

2016 Forecast Basis Pro Forma 2017 Sales $36,000 1.20 * Sales2016 $43,200 Opearting Costs $32,440 0.9011 * Sales2017 $38,928 EBIT $3,560 $4,272 Interest $460 0.11 * Debt2016 $616 EBT $3,100 $3,656 Taxes (40%) $1,240 $1,462 Net Income $1,860 $2,194 Dividends (45%) $837 $987 Addition to retained earnings $1,023 $1,207

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