At year-end 2012, total assets for Shome Inc. were $1.2 million and accounts payable were $375,000. Sales, which in 2012 were $2.5 million, are expected to increase by 25 percent in 2013. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Shome typically uses no current liabilities other than accounts payable. Common stock amounted to $425,000 in 2012, and retained earnings were $295,000. Shome plans to sell new common stock in the amount of $75,000. The firm’s profit margin on sales is 6 percent, and 40 percent of earnings will be paid out as dividends. (a) What was Shome’s total debt in 2012? (b) How much new long-term debt financing will be needed in 2013?
(Hint: AFN-New stock=New long-term debt.) Assume that Shome operated at full capacity in 2012, and do not consider any financing feedback effects.