Baldwin Products Company anticipates reaching a sales level of $6 million in one year. The company expects
Question:
Income Statement for the Year Ending December 31, 2013
Sales...........................................................$4,000,000
Expenses, including interest and taxes...................$3,700,000
Earnings after taxes..........................................$ 300,000
a. Using the percentage of sales method, calculate the additional financing Baldwin Products will need over the next year at the $6 million sales level. Show the pro forma balance sheet for the company as of December 31, 2014, assuming that a sales level of $6 million is reached. Assume that the additional financing needed is obtained in the form of additional notes payable.
b. Suppose that the Baldwin Products' management feels that the average collection period on its additional sales-that is, sales over $4 million-will be 60 days, instead of the current level. By what amount will this increase in the average collection period increase the financing needed by the company over the next year?
c. If the Baldwin Products' banker requires the company to maintain a current ratio equal to 1.6 or greater, what is the maximum amount of additional financing that can be in the form of bank borrowings (notes payable)? What other potential sources of financing are available to the company?
Step by Step Answer:
Contemporary Financial Management
ISBN: 978-1285198842
13th edition
Authors: R. Charles Moyer, James R. McGuigan, Ramesh P. Rao