12-8 Financing Deficit

Steven's Textiles 2013 financial statements are shown here:

Balance Sheet as of December 31, 2013 (Thousands of Dollars)

Cash $ 1,080 Accounts Payable $ 4,320

Receivables 6,480 Accruals 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

Income Statement for December 31, 2015 (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 forcasted 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 income statement to determine the addition to retained earnings. Assume that the company was operating at full capacity in 2013 that 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. (ANSWER IS: Total assets = $ 33,534 (thousands); Deficit = $2, 128 (thousands)---show all work and formulas to support answer

b. What is the resulting total forcasted amount of the line of credit? (ANSWER IS LOC = $4,228 (thousands)--show all work and formula to support answer)

c. In your answers to parts a and b, you should not have charged any interest on the additional debt added during 2014 becuase 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 nd b?