At year-end 2018, Marvel Company total assets were $4.5 million, and its accounts payable were $850,000. Sales, which in 2018 were $5.5 million, are expected to increase by 25% in 2019. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Marvel typically uses no current liabilities other than accounts payable. Common stock amounted to $ 2.25 million in 2018, and retained earnings were $150,000. Marvel has arranged to sell $25,000 of new common stock in 2019 to meet some of its financing needs. The remainder of its financing needs will be met by issuing new long-term debt at the end of 2019. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its net profit margin on sales is 2.5%, and 55% of earnings will be paid out as dividends.
a. What were Marvel’s total long-term debt and total liabilities in 2018?
b. How much new long-term debt financing will be needed in 2019? (Hint: AFN – New stock = New long-term debt.)
Mayor company sales are expected to increase by 20% from $5 million in 2018 to $6 million in 2019. Its assets totaled $7 million at the end of 2018. Mayor is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2018, current liabilities were $1.2 million, consisting of $500,000 of accounts payable, $300,000 of notes payable, and $400,000 of accruals. The after-tax profit margin is forecasted to be 5%, and the forecasted payout ratio is 60%.
a. Use the AFN equation to forecast Mayor’s additional funds needed for the coming year.