Question

BHM, Inc. has the following balance sheet:
Sales are currently $80,000 but are expected to fall to $60,000, which will require a contraction of assets. Since the firm is contracting, management would like to retire the long-term debt; however, the terms of the issue do not permit a partial repayment. Management would like to retain the short-term bank loan, but the bank will not renew the loan if the renewal results in the firm having a current ratio of less than 2:1. Since the firm is contracting, management would like to increase the marketable securities by $1,500 to meet emergencies. However, if the firm needs funds to retire debt, management is willing to liquidate all the marketable securities. The firm’s historical profit margin on sales of 10 percent and the firm’s policy of distributing 30 percent of earnings will be maintained.
To help forecast the firm’s future financial position, fill in all the anticipated entries in the following balance sheet using the percentage of sales applied to accounts receivable, inventory, accounts payable, and accruals prior to any change in the firm’s debt structure:
Then, construct a new pro forma balance sheet that incorporates all the anticipated changes in the assets, liabilities, and equity assuming that the firm pays the dividend, and answer the following questions. If the firm has excess cash, add it to the existing cash.
a. Can the firm retain the short-term bank loan?
b. Can the firm retire the long-term debt?
c. If the firm distributed no dividends and retained all of its earnings, could the firm retire the long-term debt?


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  • CreatedMarch 19, 2015
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