Stevens Textiles's 2013 financial statements are shown here:
Balance Sheet as of December 31, 2013 (Thousands of Dollars)

Income Statement for December 31, 2013 (Thousands of Dollars)
Sales..............................................................................$36,000
Operating costs...................................................................32,440
Earnings before interest and taxes.............................................$ 3,560
Interest.................................................................................460
Pre-tax earnings..................................................................$ 3,100
Taxes (40%)........................................................................1,240
Net income.......................................................................$ 1,860
Dividends (45%)..................................................................$ 837
Addition to retained earnings.................................................$ 1,023
a. Suppose 2014 sales are projected to increase by 15% over 2013 sales. Use the forecasted financial statement method to forecast a balance sheet and income statement for December 31, 2014. The interest rate on all debt is 10%, and cash earns no interest income. Assume that all additional debt in the form of a line of credit is added at the end of the year, which means that you should base the forecasted interest expense on the balance of debt at the beginning of the year. Use the forecasted income statement to determine the addition to retained earnings.
Assume that the company was operating at full capacity in 2013, that it cannot sell off any of its fixed assets, and that any required financing will be borrowed as notes payable. Also, assume that assets, spontaneous liabilities, and operating costs are expected to increase by the same percentage as sales. Determine the additional funds needed.
b. What is the resulting total forecasted amount of the line of credit?
c. In your answers to Parts a and b, you should not have charged any interest on the additional debt added during 2014 because it was assumed that the new debt was added at the end of the year. But now suppose that the new debt is added throughout the year. Don't do any calculations, but how would this change the answers to parts a and b?

Transcribed Image Text:

Cash Receivables Inventories Accounts payable Accruals Line of credit Notes payable $ 4,320 2,880 $ 1,080 6,480 9,000 $16,560 12,600 Total current assets Net fixed assets Total current liabilities Mortgage bonds Common stock Retained earnings 2,100 $ 9,300 3,500 3,500 Total assets 29,160 Total liabilities and equity $29,160