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 firms profit margin on sales is 6%; 60% of earnings will be retained.

a. What were Ambroses 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.)

ANSWER:

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 SO I CAN UNDERSTAND