Question
The Pioneer Company is generating its proforma balance sheet for 20x2. For the year 20x1 sales were $5 million. Sales are expected to be $5.5
The Pioneer Company is generating its proforma balance sheet for 20x2. For the
year 20x1 sales were $5 million. Sales are expected to be $5.5 million in 20x2. The company expects its net profit margin for 20x2 to equal 7%. In each of the past several years, the company has been paying $90,000 in dividends to its stockholders. The company wants to increase dividends to $100,000 in 20x2. The 20x1 Balance Sheet for Pioneer is below.
The Pioneer Company
Balance Sheet as of December 31, 20x1
Cash $ 100,000 Accounts payable $ 500,000
Accounts receivable 400,000 Notes payable 150,000
Inventories 1,200,000 Long-term debt 300,000
Fixed assets, net 500,000 Stockholders' equity 1,250,000
Total assets $2,200,000 Total liabilities & equity $2,200,000
Assume that Cash, Accounts Receivable, Inventories, and Accounts Payable vary directly with sales. Net Fixed Assets must increase by $200,000 to support the sales expansion. Notes payable are planned to decrease by $50,000. A $100,000 long-term debt payment is required in 20x2. There are no plans to issue any new shares of common stock, nor are there any plans to buy back any of their shares. Any additional financing that Pioneer will need for 20x2 will come from new long-term debt, but Pioneer has a covenant that states that their ratio of total debt to total assets may not exceed 45%. How much additional financing will Pioneer need? Can they pay the increased dividend, increase their long-term debt, and still satisfy the covenant? Show numbers to support your answer. If Pioneer cannot meet the covenant, how much new equity must be used, instead of some of the new debt, to satisfy the covenant?
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