Question

6. Problem 17.08 (Long-Term Financing Needed) eBook Problem Walk-Through At year-end 2018, total assets for Arrington Inc. were $2 million and accounts payable were $335,000. Sales, which in 2018 were $2.40 million, are expected to increase by 25% in 2019. 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 $405,000 in 2018, and retained earnings were $440,000. Arrington plans to sell new common stock in the amount of $160,000. The firm's profit margin on sales is 3%; 45% of earnings will be retained a. What were Arrington's total liabilities in 2018? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Round your answer to the nearest cent. b. How much new long-term debt financing will be needed in 2019? (Hint: AFN - New stock = New long-term debt.) Write out your answer completely. For example, 25 million should be entered as 25,000,000. Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

a). Total Liabilities = Total Assets - Total Equities

= $2,000,000 - ($405,000 + $440,000) = $2,000,000 - $845,000 = $1,155,000

b). AFN = Increased in Assets - Increased in Liabilities - Addition to Retained Earnings

= [Current Level of Spontaneous Assets * Sales Growth] - [Current Level of Spontaneous Liabilities * Sales Growth] - [New Level of Sales * Profit Margin * Retention Ratio]

= [$2,000,000 * 0.25] - [$335,000 * 0.25] - [{$2,400,000 * (1 + 0.25)} * 0.03 * 0.45]

= $500,000 - $83,750 - $40,500 = $375,750

New long-term debt = AFN - New Stock = $375,750 - $160,000 = $215,750