Stevens Textile Corporation’s 2018 financial statements are shown here:

a. Suppose 2019 sales are projected to increase by 15% over 2018 sales.
Use the forecasted financial statement method to forecast a balance sheet and income statement for December 31, 2019. 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 2018, 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 2019 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:

Balance Sheet as of December 31, 2018 (Thousands of Dollars) Cash Receivables $ 1,080 Accounts payable 6,480 Accruals $ 4,320 2,880 Inventories 9,000 Line of credit 0 Total current assets $16,560 Notes payable 2,100 Net fixed assets 12,600 Total current liabilities $ 9,300 Mortgage bonds 3,500 Common stock 3,500 Retained earnings 12,860 Total assets $29,160 Total liabilities and equity $29,160