03 Jul Acc
1. Baldwin Products Company anticipates reaching a sales level of $6 million in
one year. The company expects net income during the next year to equal
$400,000. Over the past several years, the company has been paying $50,000 in
dividends to its stockholders. The company expects to continue this policy for
at least the next year. The actual balance sheet and income statement for
Baldwin during 2005 follow.
Baldwin Products Company
Balance Sheet as of December 31, 2005
Cash $ 200,000 Accounts payable $ 600,000
Accounts receivable 400,000 Notes payable 500,000
Inventories 1,200,000 Current liabilities $1,100,000
Current assets $1,800,000 Long-term debt 200,000
Fixed assets, net 500,000 Stockholders’ equity 1,000,000
Total assets $2,300,000 Total liabilities and equity $2,300,000
Income Statement for the Year Ending December 31, 2005
Sales $4,000,000
Expenses, including interest and taxes $3,700,000
Net income $ 300,000
a. Using the percentage of sales method, calculate the additional financing
Baldwin Products will need over the next year at the $6 million sales level.
Show the pro forma balance sheet for the company as of December 31,
2006, assuming a sales level of $6 million is reached. Assume that all assets
vary proportionally with sales. Accounts payable is the only liability that
varies proportionally with sales. Assume that the additional financing
needed is obtained in the form of additional notes payable (in other words,
assume that notes payable is the “plug” figure).
b. Suppose that the Baldwin Products’ management feels that the average collection
period on its additional sales—that is, sales over $4 million—will be
60 days, instead of the current level. By what amount will this increase in
the average collection period increase the financing needed by the company
over the next year?
c. If the Baldwin Products’ banker requires the company to maintain a current
ratio equal to 1.6 or greater, what is the maximum amount of additional
financing that can be in the form of bank borrowings (notes
payable)? What other potential sources of financing are available to the
company?
10. The CFO of IPOD Accessories, Inc. has asked for your help in estimating the
firm’s additional financing needed for next year. The CFO has provided the
following information to help you with your task:
Sales are forecasted to increase by $450,000.
Total assets will increase by 80 percent of increase in sales.
Current liabilities will increase by 30 percent of increase in sales.
Net income is projected to equal $125,000.
Projected dividend payments will equal $35,000.
8. Appalachian Registers, Inc. (ARI) has current sales of $50 million. Sales are
expected to grow to $75 million next year. ARI currently has accounts
receivable of $10 million, inventories of $15 million, and net fixed assets of
$20 million. These assets are expected to grow at the same rate as sales over
the next year. Accounts payable are expected to increase from their current
level of $10 million to a new level of $13 million next year. ARI wants to
increase its cash balance at the end of next year by $2 million over its current
cash balances, which average $4 million. Net income next year is forecasted to
be $10 million. Next year, ARI plans to pay dividends of $1 million, up from
$500,000 this year. ARI’s marginal tax rate is 34 percent. How much external
financing does ARI require next year?
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