Baldwin Products Company anticipates reaching a sales level of $6 million in one year. The company expects earnings after taxes during the next year to equal $400,000. During 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 2013 follow:
Balance Sheet
Cash – 200,000 Acct Payable – 600,000
Acct Receivable – 400,000 Notes payable – 500,000
Inventories – 1,200,000 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 Year Ending December 31, 2013
Sales – 4,000,000
Expenses, including interest and taxes – 3,700,000
Earnings after taxes – 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, 2014, assuming that a sales level of $6 million is reached. Assume that the additional financing needed is obtained in the form of additional notes payable.
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?