Finding additional borrowings required from bank at given current ratio.
BPC anticipates reaching a sales level of $6 million in one year. The company expects a net income during the next year to equal $400,000. Over the past several years, the company has been paying 50k 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 BPC are as follows:
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BPC Balance sheet as of December 31, 2005
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Cash
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200,000
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Accounts Payable
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600,000
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Accounts receivable
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400,000
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Notes Payable
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500,000
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Inventories
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1,200,000
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Current liabilities
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1,100,000
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Current assets
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1,800,000
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Long-term debt
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200,000
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Net fixed assets
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500,000
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Stockholder's equity
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1,000,000
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Total assets
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2,300,000
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Total Liabilities and equity
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2,300,000
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a) Using the percentage of sales method, calculate the additional financing needed over the next year at the $6 million sales level. Show the pro forma balance sheet for the company as of Dec 31, 2006; assuming a sales level of $6 million is reached. Assume that all assets vary proportionately with sales. Accts payable is the only liability that varies proportionately with sales. Assume additional financing needed is obtained in the form of notes payable.
b) Suppose BPC mgmt feels the average collection period on additional sales (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 BPC's banker requires the company to maintain a current ratio equal to 1.6 or greater, what is the max 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?