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


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:

Long-Term Debt: Definition, Cost & Formula

from Financial Accounting: Help and Review

Chapter 8 / Lesson 7

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