Suppose that the 2009 actual and 2010 projected financial statements for Counter Corp are initially as shown below. In these tables, sales are projected to rise 35 percent in the coming year, and the components of the income statement and balance sheet that are expected to increase at the same 35 percent rate as sales are indicated with an italics font. Assuming that Counter Corp wants to cover the AFN with 60 percent equity, 25 percent long-term debt, and the remainder from notes payable, what amount of additional funds will they need to raise if debt carries an 8 percent interest rate?
A) $217,260 equity; $90,525 long-term debt; $54,315 notes payable
B) $217,260 equity; $90,525 notes payable; $54,315 long-term debt
C) $54,315 equity; $90,525 long-term debt; $217,260 notes payable
D) none of these answers are correct

Question

Suppose that the 2009 actual and 2010 projected financial statements for Counter Corp are initially as shown below. In these tables, sales are projected to rise 35 percent in the coming year, and the components of the income statement and balance sheet that are expected to increase at the same 35 percent rate as sales are indicated with an italics font. Assuming that Counter Corp wants to cover the AFN with 60 percent equity, 25 percent long-term debt, and the remainder from notes payable, what amount of additional funds will they need to raise if debt carries an 8 percent interest rate? 
A) $217,260 equity; $90,525 long-term debt; $54,315 notes payable 
B) $217,260 equity; $90,525 notes payable; $54,315 long-term debt 
C) $54,315 equity; $90,525 long-term debt; $217,260 notes payable 
D) none of these answers are correct

Quizplus · Accepted Answer

1. First, we need to calculate the total amount of assets that will be needed in 2010.
Total Assets = (Projected Sales/Asset Turnover Ratio) + Increase in Assets as a percent of sales
= (2,240/1.6) + (35% x 2,240)
= $3,472

2. Next, we need to calculate the total amount of liabilities and equity needed to support these assets.
Equity = 60% x $3,472 = $2,083
Long-term Debt = 25% x $3,472 = $868
Notes Payable = $3,472 - $2,083 - $868 = $521

3. We also need to calculate the interest expense on the new debt.
Interest Expense = 8% x $868 = $69.44

4. Finally, we can calculate the additional funds needed (AFN).
AFN = Increase in Total Assets - Increase in Total Liabilities - Increase in Retained Earnings
AFN = $3,472 - $868 - $69 - $2,240
AFN = $295.04

Therefore, the additional funds that Counter Corp needs to raise are $217,260 equity, $90,525 long-term debt, and $54,315 notes payable. This matches option A.

Suppose That the 2009 Actual and 2010 Projected Financial Statements