Financing Deficit
Stevens Textile Corporation's 2016 financial statements areshown below:
Balance Sheet as of December 31, 2016 (Thousands ofDollars)
| 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, 2016(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 |
- Suppose 2017 sales are projected to increase by 10% over 2016sales. Use the forecasted financial statement method to forecast abalance sheet and income statement for December 31, 2017. Theinterest rate on all debt is 7%, and cash earns no interest income.Assume that all additional debt in the form of a line of credit isadded at the end of the year, which means that you should base theforecasted interest expense on the balance of debt at the beginningof the year. Use the forecasted income statement to determine theaddition to retained earnings. Assume that the company wasoperating at full capacity in 2016, that it cannot sell off any ofits fixed assets, and that any required financing will be borrowedas a line of credit. Also, assume that assets, spontaneousliabilities, and operating costs are expected to increase by thesame percentage as sales. Determine the additional funds needed.Round your answers to the nearest dollar. Do not round intermediatecalculations.
- What is the resulting total forecasted amount of the line ofcredit? Round your answer to the nearest dollar. Do not roundintermediate calculations.
Line of credit $
- In your answers to Parts a and b, you should not have chargedany interest on the additional debt added during 2017 because itwas assumed that the new debt was added at the end of the year. Butnow suppose that the new debt is added throughout the year. Don'tdo any calculations, but how would this change the answers to partsa and b?
