Stevens Textiless 2010 financial statements are shown below:

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

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

Also, assume that assets, spontaneous liabilities, and operating costs are expected to increas
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 added

But now suppose that the new debt is added throughout the year. Dont do any calculations, b
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
Assets = Liabilities + capital
Hence,
33,534 = 31,406.22 + 0.9835X

goal seek method

2011

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

5600 + 0.5X

=====

X=

2163.4773767

The successive approximation method works as follows:

Cash
AR
Inventory
Net FA

Balance sheet
Year
2010
2011
stage 1
stage 2
1080
1242
6480
7452
9000
10350
12600
14490

stage 3

Stage 4

AP
AE
Capital
NP - new
NP - old
Mortgage loan
Common stock
RE

Total

29160
4320
2880
21960
0
2100
3500
3500
12860
21960

33534
4968
3312
25254

25254

25254

2128
2,162.89
2,163.47
2100
2100
2100
3500
3500
3500
3500
3500
3500
14,026 13,991.11 13,990.53
25254
25254
25254

2,163.48
2100
3500
3500
13,990.52
25254

16,154

25254

16,154

16,154

16,154

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

nnot sell off any of its fixed assets, and that any required financing will be borrowed as notes payable.

ts are expected to increase by the same percentage as sales.

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

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
Stage1
stage 2
stage 3
stage 4
Sales
36000
41400
41400
41400
41400
Optg costs
32440
37306
37306
37306
37306
EBIT
3560
4094
4094
4094
4094
Interest
460
560
666.389
668.14
668.17

PBT
Taxes
net income
dividend 45%
Addition to RE

3100
1240
1860
837
1023

3534
1413.6
2120.4
954.18
1166.22

3,427.61
1,371.04
2,056.57
925.45
1,131.11

3,425.86
1,370.34
2,055.51
924.98
1,130.53

By end of Stage 4 approximation, the new loan amount

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

3,425.83
1,370.33
2,055.50
924.97
1,130.52

me statement for December 31, 2011.

you should base the forecasted

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