At year-end 2008, total assets for Ambrose Inc. were $1.2 million and

QUESTION

At year-end 2008, total assets for Ambrose Inc. were $1.2 million and accounts payable were $375,000. Sales, which in 2008 were $2.5 million, are expected to increase by 25% in 2009. 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 2008, and retained earnings were $295,000. Ambrose plans to sell new common stock in the amount of $75,000. The firms profit margin on sales is 6%; 60% of earnings will be retained.a. What was Ambroses total debt in 2008?b. How much new long-term debt financing will be needed in 2009?
Answer: 2008 Total assets = $1.2 MN Accounts Payable = $0.375 MN Common Stock = 0.425 MN Retained Earnings = 0.295 MN Total debt = Total assets -common stock-retained earnings = $1.2 -$0.425- $0.295 = $0.48MN B. 2009 Sales = 2.5 * 1.25 = $ 3.125 MN Accounts payable = (0.375/2.5)*3.125 =$ 0.468 MN Total Assets = (1.2/2.5) * 3.125 = $1.5 MN Retained earnings: Profit = 6% of sales = 3.125*6% = $ 0.1875 MN Retained amount = 60% of profit = 0.60*0.1875 = $0.1125 MN¦

tal retained earnings = 0.1125+0.295 = $ 0.4075 MN New share issue = $ 0.075 MN Common stock = 0.075 + 0.425 = $0.50 MN Debt in 2008 = $ 0.48 MN Long term Financing in 2009 = Total assets -accounts payable- retained earnings-common stock-debt in 2008 = 1.5 0.468-0.40750-0.50-0.48 = $ 0.355 or $ 355500.

ANSWER:

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