Suppose that the 2013 actual and 2014 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 these answers is correct.

Question

Suppose that the 2013 actual and 2014 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 these answers is correct.

Quizplus · Accepted Answer

First, we need to calculate the required total assets, which is the sum of the projected increase in all asset accounts:

Total assets = 2014 projected assets - 2013 actual assets 
Total assets = ($12,810 + $6,567 + $1,350 + $3,804) - ($10,890 + $5,760 + $1,134 + $3,240) 
Total assets = $24,531 - $20,024 
Total assets = $4,507 million

Next, we need to calculate the required total liabilities and equity using the following formula:

AFN = (A*/S0)ΔS - (L*/S0)ΔS - MS1(RR) 
Where: 
A* = assets that increase with sales (in this case, all asset accounts) 
S0 = initial sales 
ΔS = increase in sales 
L* = liabilities that increase with sales (in this case, notes payable and long-term debt only) 
MS1 = increase in spontaneous liabilities (in this case, accounts payable) 
RR = retention ratio = 1 - dividend payout ratio

AFN = ($4,507/$12,810)35% - (($90,525+$54,315)/$12,810)35% - ($3,240/1 - 45%)($0.45) 
AFN = $579.935 million 
AFN ≈ $580 million

Now we can calculate the required amounts of equity, long-term debt, and notes payable based on the target financing mix:

Equity = 60%($580 million) = $348 million 
Long-term debt = 25%($580 million) = $145 million 
Notes payable = $580 million - $348 million - $145 million = $87 million

To find out how much interest expense the company will have to pay on the additional debt, we can use the following formula:

Interest expense = interest rate × debt 
Interest expense = 8%($145 million) 
Interest expense = $11.6 million

Therefore, the company will need to raise an additional $217,260 equity, $90,525 long-term debt, and $54,315 notes payable.

Suppose That the 2013 Actual and 2014 Projected Financial Statements