Problem 17-8 Long-term financing needed At year-end 2012, total assets for Ambrose Inc. were $1.8 million and accounts payable were $305,000. Sales, which in 2012 were $2.7 million, are expected to...

Problem 17-8
Long-term financing needed
At year-end 2012, total assets for Ambrose Inc. were $1.8 million and accounts payable were $305,000. Sales, which in 2012 were $2.7 million, are expected to increase by 30% in 2013. 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. Ambrose typically uses no current liabilities other than accounts payable. Common stock amounted to $480,000 in 2012, and retained earnings were $330,000. Ambrose plans to sell new common stock in the amount of $170,000. The firm's profit margin on sales is 3%; 50% of earnings will be retained.
0. What was Ambrose's total debt in 2012? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Round your answer to the nearest cent.
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1. How much new long-term debt financing will be needed in 2013? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Round your answer to the nearest cent. (Hint: AFN - New stock = New long-term debt.)
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Answer:
1)
Total liabilities and equity = Accounts payable + Long-term debt + common stock + Retained earnings
$1,800,000 = $305,000 + Long-term debt + $480,000 + $330,000
$1,800,000 = $1,115,000 + Long-term debt
Long-term debt = $1,800,000 - $1,115,000
Long-term debt = $685,000
2) Assets/Sales (A*/S) = $1,800,000/$2,700,000 = 66.67%.
L*/Sales = $305,000/$2,700,000 = 11.3%.
2013 Sales = (1.30) ($2,700,000) = $3,510,000.
AFN = (A*/S) (DS) - (L*/S) (DS) - MS1 (1 - d) - New common stock
= (0.6667) ($810,000) - (0.113) ($810,000) - (0.03) ($3,510,000) (0.50) – 170,000
= $540,027 - $91,530 - $52,650 – 170,000
= $225,847
Problem 17-9
Sales increase
Pierce Furnishings generated $4 million in sales during 2012, and its year-end total assets were $2.8 million. Also, at year-end 2012, current liabilities were $500,000, consisting of $200,000 of notes payable, $200,000 of accounts payable, and $100,000 of accrued liabilities. Looking ahead to 2013, the company estimates that its assets must increase by $0.70 for every $1.00 increase in sales. Pierce's profit margin is 4%, and its retention ratio is 45%. How large of a sales increase can the company achieve without having to raise funds externally? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Round your answer to the nearest cent.
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Answer:
We have A = 2,800,000,
S0 = 4,000,000,
∆S = S1 – S0 = S1 – 4,000,000
L = 200,000 + 100,000 = 300,000
M = 4%
d = 0.45
Since increase in sales does not raise funds externally, therefore AFN = 0
AFN = (A*/S0) ∆S - (L*/S0) ∆S – MS 1(1 - d)
0 = (2,800,000/4,000,000) (S1-4,000,000)-(300,000/4,000,000) (S1-4,000,000)-4%*S1*(1 – 0.45)
0 = 0.7 (S1-4,000,000) -0.075 (S1-4,000,000) - 0.022S1
0 = 0.7S1 – 2,800,000 – 0.075S1 + 300,000 – 0.022S1
0 = 0.603S1 - 2,500,000
0.603S1 = 2,500,000
S1 = 2,500,000/0.603
= 4,145,937
Sales increase = S1 – S0
= 4,145,937 – 4,000,000
=$145,937
Problem 17-11
Regression and inventories
Charlie's Cycles Inc. has $90 million in sales. The company expects that its sales will increase 5% this year. Charlie's CFO uses a simple linear regression to forecast the company's inventory level for a given level of projected sales. On the basis of recent history, the estimated relationship between inventories and sales (in millions of dollars) is as follows:
Inventories = 15 + 0.1540(Sales)
0. Given the estimated sales forecast and the estimated relationship between inventories and sales, what are your forecasts of the company's year-end inventory level? Enter your answer in millions. For example, an answer of $25,000,000 should be entered as 25. Round your answer to two decimal places.
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million
1. What are your forecasts of the company's year-end inventory turnover ratio? Round your answer to two decimal places.
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Answer:
1)
S1 = $90,000,000*1.05 = $94,500,000
Inventories = 15 + 0.1540 ($94.5)
= $29.55 million
2)
Inventory turnover ratio = Sales/Inventory
= $94,500,000/$29,550,000
= 3.20
Problem 17-14
Excess capacity
Krogh Lumber's 2012 financial statements are shown here.
    Krogh Lumber: Balance Sheet as of December 31, 2012 (Thousands of Dollars)
    Cash
    $1,800
    
    Accounts payable
    $7,200
    Receivables
    10,800
    
    Notes payable
    3,472
    Inventories
    12,600
    
    Accrued liabilities...