Question

Financing Deficit 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 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

Answer 1

Part a: Stevens Textile Corporation Pro Forma Income Statement December 31, 2019 Forecast 2,018 Basis Sales 36,000 1.15 x Sales (2018) Operating costs 32,440 0.901x' Sales(2019) | EBIT 3,560 Interest 460 0.06 x Debt(2018) Pro Forma 2,019 41.400 37,306 4,094 336 EBT Taxes (40%) 3,100 1,240 3,758 1,503 Net income 1,860 2,255 837 1,015 Dividends: Addition to RE: 1,023 1,240

Stevens Textile Corporation Pro Forma Balance Statement December 31, 2019 Forecast Basis % 2018 1,080 0.03 Additions 2019 1,242 AFN With AFN Effects 2019 1,242 Cash 6,480 Receivables Inventories 0.18 0.25 7,452 10,350 7,452 10,350 9,000 Total curr, assets Fixed assets 16,560 12,600 29,160 19,044 14,490 19,044 14,490 0.35 Total assets 33,534 33,534 4,320 4,968 4,968 0.12 0.08 3,312 4,154 2,054 Accounts payable Accruals Note payable Total curr. liabilities Long-term debt Total debt Common stock Retained eamings Total liab.and equity 3,312 2,100 10,380 3,500 12,434 3,500 2,880 2,100 9,300 3,500 12,800 3,500 12,860 29,160 1,240 13,880 3,500 14,100 31,480 2,054 15,934 3,500 14,100 33,534 AFN = (33534-31480) Total assets AFN 33,534 2,054 Part b: Line of credit 2,054 Part 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 lower, and the AFN to be higher. Thus, you would have to add more than $2054 in new debt.