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BE14e Exercise 12.8 - Solution Under Both Methods

Stevens Textiles projected a 15% increase in 2011 sales over 2010. Using forecasted financial statements, additional funds needed were calculated to be $2,127.78 through increasing notes payable. The resulting total notes payable would be $4,227.78. Alternatively, using a goal seek method, the additional funds needed were $2,163.48, resulting in total notes payable of $4,263.48. If new debt was added throughout 2011 rather than at the end, it would change the interest calculation and thus the amounts of additional funds needed and total notes payable.

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206 views6 pages

BE14e Exercise 12.8 - Solution Under Both Methods

Stevens Textiles projected a 15% increase in 2011 sales over 2010. Using forecasted financial statements, additional funds needed were calculated to be $2,127.78 through increasing notes payable. The resulting total notes payable would be $4,227.78. Alternatively, using a goal seek method, the additional funds needed were $2,163.48, resulting in total notes payable of $4,263.48. If new debt was added throughout 2011 rather than at the end, it would change the interest calculation and thus the amounts of additional funds needed and total notes payable.

Uploaded by

JayMandliya
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Stevens Textiless 2010 financial statements are shown below:

a. Suppose 2011 sales are projected to increase by 15% over 2010 sales. Use the forecasted fi
The interest rate on all debt is 10%, and cash earns no interest income. Assume that all ad
interest expense on the balance of debt at the beginning of the year. Use the forecasted in

Assume that the company was operating at full capacity in 2010, that it cannot sell off any of its fixe

Also, assume that assets, spontaneous liabilities, and operating costs are expected to incre
Determine the additional funds needed.

b. What is the resulting total forecasted amount of notes payable?

c. In your answers to Parts a and b, you should not have charged any interest on the additional debt ad

But now suppose that the new debt is added throughout the year. Dont do any calculation
SOLUTION

Balance sheet
Year
2010
2011
Cash
1080
1242
AR
6480
7452
Inventory
9000
10350
Net FA
12600
14490
29160
33534
AP
4320
4968
AE
2880
3312
NP
2100
2100
Mortgage loan
3500
3,500
Common stock
3500
3500
RE
12860 14,026.22
29160 31406.22
New debt as NP
2127.78
Average debt

goal seek method


2011

33534 + 0
4968
3312
2,100 + X
3500
3500
14026.22 - 0.0165X
31406.22 + 0.9835X

5600 + 0.5X

Assets = Liabilities + capital


Hence,
33,534 = 31,406.22 + 0.9835X

====

X=

2163.4774

The successive approximation method works as follows:


Balance sheet
Year
2010
Cash
AR
Inventory
Net FA
AP
AE

2011
stage 1
stage 2
1080
1242
6480
7452
9000
10350
12600
14490
29160
33534
4320
4968
2880
3312

stage 3

Stage 4

21960
Capital
NP - new
NP - old
Mortgage loan
Common stock
RE

Total

0
2100
3500
3500
12860
21960

25254

25254

25254

25254

3294 2,182.13
2,163.79
2,163.48
2100
2100
2100
2100
3500
3500
3500
3500
3500
3500
3500
3500
12,860 13,971.87 13,990.21 13,990.52
25254
25254
25254
25254
16,154

16,154

16,154

16,154

sales. Use the forecasted financial statement method to forecast a balance sheet and income statement for
income. Assume that all additional debt is added at the end of the year, which means that you should base
e year. Use the forecasted income statement to determine the addition to retained earnings.

it cannot sell off any of its fixed assets, and that any required financing will be borrowed as notes payable.

g costs are expected to increase by the same percentage as sales.

erest on the additional debt added during 2011 because it was assumed that the new debt was added at the end of the

ar. Dont do any calculations, but how would this change the answers to parts a and b?

Income statement
2010
2011
15% Sales
36000
41400
Optg costs
32440
37306
EBIT
3560
4094
Interest
460
560
PBT
3100 3,534.00
Taxes
1240 1,413.60
net income
1860 2,120.40
dividend 45%
837
954.18
Add to RE
1023 1,166.22
Interest rate
New debt as NP

goal seek method


2011
41400
37306
4094
560 + 0.05X
3534 - 0.05X
1413.6 - 0.02X
2120.4 - 0.03X
954.18 - 0.0135X
1166.22 - 0.0165X

10%
10%
2127.78 2,163.48

Income statement
2010
2011
stage 1 stage 2 stage 4
Sales
36000
41400
Optg costs
32440
37306
EBIT
3560
4094
4094
4094
Interest
460
724.7
669.11
668.19
PBT
3100 3,369.30 3,424.89 3,425.81
Taxes
1240 1,347.72 1,369.96 1,370.32
net income
1860 2,021.58 2,054.94 2,055.49

dividend 45%
Addition to RE

837
909.71
1023 1,111.87

924.72
1,130.21

924.97
1,130.52

By end of Stage 4 approximation, the new loan amount


(2163.48) is same as that of answer for goal seek (cell
L28).

and income statement for December 31, 2011.


eans that you should base the forecasted
earnings.

s notes payable.

was added at the end of the year.

a) AFN = 2,127.78
b) NP level 4227.78
c) AFN =
2,163.48
NP level 4,263.48

A/S =
L/S =

0.81
0.20

30240
1166.22
31406.22
2127.78
2163.48

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