problem:
EEM, Inc. has the following balance sheet:
EEM, Incorporated Balance Sheet as of 12/31/X0
Assets Liabilities and Equity
Cash $ 1,000 Accounts payable $ 5,300
Accounts receivable 7,200 Bank note payable 3,200
Inventory 6,100
Long-term assets 4,200 Equity 10,000
$18,500 $18,500
It has estimated the following relationships between sales and the various assets and liabilities that vary with the level of sales:
Accounts receivable = $3,310 + 0.35 Sales,
Inventory = $2,264 + 0.28 Sales,
Accounts payable = $1,329 + 0.22 Sales.
a. If the firm expects sales of $25,000, what are the forecasted levels of the balance sheet items above?
b. Will the expansion in accounts payable cover the expansion in inventory and accounts receivable?
c. If the firm earns 12 percent on sales after taxes and retains all of these earnings, will it cover its estimated needs for short-term financing?
d. Construct a new balance sheet that incorporates the issuing of additional short-term debt to cover any needs for additional finance. Assume cash remains $1,000.