Question

Stevens Textile Corporation's 2018 financial statements are shown below:

Balance Sheet as of December 31, 2018 (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 January 1 - December 31, 2018 (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

1. Suppose 2019 sales are projected to increase by 15% over 2018 sales. Use the forecasted financial statement method to forecast a balance sheet and income statement for December 31, 2019. The interest rate on all debt is 9%, 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 2018, 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. Do not round intermediate calculations. Round your answers to the nearest dollar.
   Total assets: $  
   AFN: $  
2. 
   
3. What is the resulting total forecasted amount of the line of credit? Do not round intermediate calculations. Round your answer to the nearest dollar.
   $  
4. 
   
5. In your answers to Parts a and b, you should not have charged any interest on the additional debt added during 2019 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 -Select-higherlowerItem 4 than in the projections of part a. This would cause net income to be -Select-higherlowerItem 5 , the addition to retained earnings to be -Select-higherlowerItem 6 , and the AFN to be -Select-higherlowerItem 7 . Thus, you would have to -Select-add insubtract fromItem 8 new debt.

Answer 1

Answers:

a.

Total assets: 33,534

AFN (deficit) : 2,109

Calculation:

	2018	Forecast %	2019
Sales	36000	15%	41400
Operating costs	32440	15%	37306
Earnings before	3560		4094
Interests and taxes
Interest	460		504	[9% interest on notes payable and mortgage]
Pre tax earnings	3100		3590
Taxes 40%	1240		1436
Net income	1860		2154
Dividends 45%	837		969.3
Addition to RE	1023		1184.7

	2018	Forecast %	Proforma	Financing	2019
Cash	1,080.0	15%	1,242.0		1,242.0
AR	6,480.0	15%	7,452.0		7,452.0
Inventories	9,000.0	15%	10,350.0		10,350.0
Total Current Assets	16,560.0		19,044.0		19,044.0
Fixed Assets	12,600.0	15%	14,490.0		14,490.0
Total Assets	29,160.0		33,534.0		33,534.0
Accounts Payable	4,320.0	15%	4,968.0		4,968.0
Accruals	2,880.0	15%	3,312.0		3,312.0
Line of credit	-		-	2,109.3	2,109.3
Notes payable	2,100.0		2,100.0		2,100.0
Total Current liabilities	9,300.0		10,380.0		12,489.3
Mortgage bonds	3,500.0		3,500.0		3,500.0
Common stock	3,500.0		3,500.0		3,500.0
RE	12,860.0	1184.7	14,044.7		14,044.7
Total liabiliies and Equity	29,160.0		31,424.7		33,534.0
Deficit			(2,109.30)

The additional investment in assets = change in total assets, Because there are not short term investments:

   Additional investments in assets = $33,534 − $29,160 = $4,374

The additional financing from the increase in spontaneous liabilities and from the reinvested earnings is:  

Additional financing = [($4,968 + $3,312) – ($4,320 + $2,880)] + $1,184.7

= $1,080 + $1,184.7 = $2,264.7

   Financing surplus (deficit) = Additional financing – Additional assets

= $2,264.7− $4,374 = −$2,109.30

Then, Line of credit should be $2,109.30

b. Total forecasted amount of the line of credit : 2,109

Explanation

Line of credit will be the amount of a financing deficit. So that is $2,109.30

c. If debt is added throughout the year rather than only at the end of the year, interest expense will be higher than in the projections of part a. This would cause net income to be lower, the addition to retained earnings to be higher, and the AFN to be higher. Thus, you would have to add more than $2,109 in new debt.