Suppose that the 2017 actual and 2018 projected financial statements for Counter Corp. are initially as shown in the following tables. 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 the options are correct.

Question

Suppose that the 2017 actual and 2018 projected financial statements for Counter Corp. are initially as shown in the following tables. 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 the options are correct.

Quizplus · Accepted Answer

1. Calculate the projected increase in assets:
2018 projected assets = $17,500 + (35% x $17,500) = $23,625

2. Calculate the projected increase in spontaneous liabilities:
2018 projected spontaneous liabilities = $8,750 + (35% x $8,750) = $11,813

3. Calculate the projected increase in retained earnings:
2018 projected retained earnings = $4,375 + (35% x $4,375) = $5,906.25

4. Calculate the projected increase in the AFN:
2018 projected AFN = $23,625 - $11,813 - $5,906.25 - $2,500 = $3,405.75

5. Determine the proportion of financing to be obtained from equity, long-term debt, and notes payable:
Equity = 60% x $3,405.75 = $2,043.45
Long-term debt = 25% x $3,405.75 = $851.44
Notes payable = $3,405.75 - $2,043.45 - $851.44 = $511.86

6. Calculate the amount of interest to be paid on the long-term debt:
Interest expense = $851.44 x 8% = $68.12

7. Calculate the total amount of funds to be raised:
Total funds = $2,043.45 + $851.44 + $511.86 + $68.12 = $3,475.87

Therefore, the answer is A) $217,260 equity; $90,525 long-term debt; $54,315 notes payable.

Suppose That the 2017 Actual and 2018 Projected Financial Statements