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Esther's Egg Farm is constructing its pro forma financial statements for this year. At year end,...

Question:

Esther's Egg Farm is constructing its pro forma financial statements for this year. At year end, assets were $400,000 and accounts payable (the only current liabilities account) were $125,000. Last year's sales were $500,000. Esther's expects to grow by 15 percent this year. Assets and accounts payable are expected to grow proportionally to sales. Common stock currently equals $140,000, and retained earnings are $98,000. Esther's plans to sell $15,000 of new common stock this year. The firm's profit margin on sales is 6 percent, and 40 percent of earnings will be paid out as dividends. How much new long-term debt financing will Esther's need this year to finance its expected growth?

Long term Debt:

Long-term debt generally is an outstanding debt from company's loans and liabilities that becomes due after one year of the debt. It is classified as a non-current liability on the company's balance sheet and helps to finance long term projects, goals and expansion of a company. Long term debts include bonds, mortgages, bank loans, debentures, etc.

Answer and Explanation:

Esther's Egg Farm

Last Year Amt $ %
Sales 500,000 100%
Asset 400,000 80%
Liabilities & Equity
Accounts Payable 125,000 25%
Common Stock 140,000 28%
Retained earnings 98,000 20%
Long term Debt 37,000 Balance
Total liabilities & Equity 400,000

Proforma Financial statement

Current Year Amount $ %
Sales 575,000 100%
Net Profit @ 6% 34,500
Dividend payout @ 40% 13,800
Transfer to retained earnings 20,700 (34,500 - 13,800)

Proforma Balance Sheet

Assets 460,000 80% of sales
Liabilities & Equity
Accounts Payable 143,750 25% of sales
Common Stock 155,000 addition of new issue of shares of 15,000
Retained earnings 118,700 Addition of 20,700
Long term Debt 42,550 Balance
Total liabilities & Equity 460,000

Hence, new long-term debt financing Esther needs this year to finance its expected growth is $ 5,550.00 ( 42,550 - 37,000)


Learn more about this topic:

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Long-Term Debt: Definition, Cost & Formula

from Financial Accounting: Help and Review

Chapter 8 / Lesson 7
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