Stevens Textile Corporation's 2016 financial statements are shown below: Balance Sheet as of December 31, 2016 (Thousands

Question:

Stevens Textile Corporation's 2016 financial statements are shown below:

Balance Sheet as of December 31, 2016 (Thousands of Dollars)

Cash ............................... $ 1,080 .......... Accounts payable ...................... $ 4,320

Receivables .......................... 6,480 .......... Accruals .................................... 2,880

Inventories ......................... 9,000 ........... Line of credit ................................... 0

Total current assets ............... $16,560 ........ Notes payable .............................. 2,100

......................................................... Total current liabilities ................. $ 9,300

......................................................... Mortgage bonds ........................... 3,500

......................................................... Common stock ............................ 3,500

......................................................... Retained earnings ....................... 12,860

Total assets ..................... $29,160 .......... Total liabilities and equity ............ $29,160

Income Statement for December 31, 2016 (Thousands of Dollars)

Sales .................................................... $36.000

Operating costs .......................................... 32,440

Earnings before interest and taxes ................... $ 3,560

Interest ....................................................... 460

Pre-tax earnings ........................................ $ 3,100

Taxes (40%) ............................................... 1,240

Net income .............................................. $ 1,860

Dividends (45%) .......................................... $ 837

Addition to retained earnings ........................ $ 1,023

a. Suppose 2017 sales are projected to increase by 15% over 2016 sales. Use the forecasted financial statement method to forecast a balance sheet and income statement for December 31, 2017. The interest rate on all debt is 10%, and cash earns no interest income. Assume that all additional debt in the form of a line of credit is added at the end of the year, which means that you should base the forecasted interest expense on the balance of debt at the beginning of the year. Use the forecasted income statement to determine the addition to retained earnings. Assume that the company was operating at full capacity in 2016, that it cannot sell off any of its

fixed assets, and that any required financing will be borrowed as notes payable. Also, assume that assets, spontaneous liabilities, and operating costs are expected to increase by the same percentage as sales. Determine the additional funds needed.

b. What is the resulting total forecasted amount of the line of credit?

c. In your answers to Parts a and b, you should not have charged any interest on the additional debt added during 2017 because it was assumed that the new debt was added at the end of the year. But now suppose that the new debt is added throughout the year. Don't do any calculations, but how would this change the answers to parts a and b?

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