LONG-TERM FINANCING NEEDED At year-end 2015, total assets for Ambrose Inc. were $1 2 million and accounts payable were $375,000. Sales, which in 2015 were $2 5 million, are expected to increase by 25% in 2016. Total assets and accounts payable are proportional to sales, and that relationship will be maintained; that is, they will grow at the same rate as sales. Ambrose typically uses no current liabilities other than accounts payable. Common stock amounted to $425,000 in 2015, and retained earnings were $295,000. Ambrose plans to sell new common stock in the amount of $75,000. The firm’s profit margin on sales is 6%; 60% of earnings will be retained.
a. What were Ambrose’s total liabilities in 2015?
b. How much new long-term debt financing will be needed in 2016? (Hint: AFN − New stock New long term debt.)
Ambrose Inc.
(a) Total Assets $1,200,000
Common Stock $425,000
Retained Earnings $295,000
Total Debt (2015) $480,000
(b) Total Assets $1,200,000
Account Payable $375,000
Sales (2015) $2,500,000
Expected Growth in Sales 25%
Increase in Sales $625,000
Expected Sales (2016) $3,125,000
Profit Margin on Sales 6%
Retention Ratio 60%
Additional Financing Needed = (((Assets/Sales)*Change in Sales) - ((Accounts Payable/Sales)*Change in Sales) - Profit Margin*Expected Sales*Retention Ratio)
Additional Fund Needed (AFN) $93,750
New Stock $75,000
New Long-term Debt Needed (2016) $18,750 Additional Funds Needed - New Stock
PLEASE EXPLAIN THESE CALCULATIONS STEP BY STEP USING WORDS