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The balance sheet and income statement of the Grow 'n' Glow Manufacturing Company for the past year are as follows (000 omitted):
BALANCE SHEET Assets Liabilities Cash $ 9,700 Accounts payable $ 3,000 Accounts receivable 15,300 Notes payable 10,000 Inventory 18,500 Accrued liabilities 6,000 Total current assets $ 43,500 Total current liabilities $ 19,000
Held-to-maturity securities $ 45,600 Long-term debt $ 35,600 Net fixed assets 32,200 Total liabilities $ 54,600 Total long-term assets $ 77,800
Equity Total assets $121,300 Common stock $ 10,000 Additional paid-in capital 30,000 Retained earnings 26,700 Total equity $ 66,700
Total liabilities & equity $121,300
INCOME STATEMENT Net sales $100,000 Cost of goods sold 66,200 Gross profit $ 33,800
Selling expense 16,400 General & admin. expense 11,200 EBIT $ 6,200 Net interest expense $ 1,200 EBT $ 5,000 Taxes @ 35% 1,750 Net income $ 3,250
The company paid dividends during the past year of $975. During the past year, fixed assets were being used at 85% of capacity. In all other respects, the company was operating at full capacity. The company's dividend policy is that dividends will grow at a rate of 4% per year. The past year's interest rate on debt was 5% on short-term debt and 7% on long-term debt. The held-to-maturity securities earn 4% return and are not expected to change next year. Sales for next year are projected to increase at the rate of 15%. Using the Forecasted Financial Statement approach, how much additional financing will the company need next year? For the interest expense calculations, use the beginning balance of outstanding loans and an interest rate that is 0.5% higher than the past year's interest rates. (Hint: Since the company is operating at 100% of capacity in all respects except for fixed assets, and since held-to-maturity securities are not expected to change, all incomes and expenses and all assets except for held-to-maturity securities and fixed assets will increase by the same amount for the next year. To determine whether fixed assets will increase and if so, by how much, determine how much sales could increase without requiring additional fixed asset purchases and then compare that with forecasted sales for next year.)
A. $5,175 B. $455 C. $2,462 D. $1,448 |