Question

LONG-TERM FINANCING NEEDED

At year-end 2016, total assets for Arrington Inc. were $1.9 million and accounts payable were $305,000. Sales, which in 2016 were $3 million, are expected to increase by 15% in 2017. Total assets and accounts payable are proportional to sales, and that relationship will be maintained; that is, they will grow at the same rate as sales. Arrington typically uses no current liabilities other than accounts payable. Common stock amounted to $475,000 in 2016, and retained earnings were $215,000. Arrington plans to sell new common stock in the amount of $105,000. The firm's profit margin on sales is 8%; 35% of earnings will be retained.

1. What were Arrington's total liabilities in 2016? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Round your answer to the nearest cent.
   $_____?
2. 
   
3. How much new long-term debt financing will be needed in 2017? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Do not round your intermediate calculations. Round your answer to the nearest cent. (Hint: AFN - New stock = New long-term debt.)
   $_____?

Answer 1

Solution: total assets Less : common stock Less : retained earnings total liabilities in 2016 1900000 -475000 -215000 1210000 working 1900000*0.15 305000*0.15 - calculation of AFN Increase in total assets Less : Increase in spontaneous liability (accounts payable) total fund needed Less : new stock issued Less : addition to retained earning** new long term debt financing needed 285,000 45,750 239,250 105,000 96,600 37,650 addition to retained earning** sales profit margin addition to retained earning 3000000*1.15 3450000*0.08 276000*0.35 $ 3,450,000 276,000 96,600