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:

(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

QUESTION: Provide two or more suggestions on what Ambrose Inc. could do to reduce the forecasted debt financing (the managerial part of financing). Be sure to provide rationales as to why your suggestions will be effective in reducing the forecasted debt financing need. [1 PAGE IN LENGTH]