Calculating Additional Finance Requirements & Average Collection Period.
Baldwin Products Co. anticipates reaching a sales level of $6 million in one year. The company expects net income during the next year to equal $400,000. Over the past several years, the company has been paying $50,000 in dividends to its stockholders. The company expects to continue this policy for at least the next year. The actual balance sheet and income statement for Baldwin during 2005 follow.
Baldwin Products Co.
Balance Sheet as of December 31, 2005
|
Cash
|
$200,000
|
Accounts Payable
|
$600,000
|
|
Accounts Receivable
|
$400,000
|
Notes Payable
|
$500,000
|
|
Inventories
|
$1,200,000
|
Current Liabilities
|
$1,100,000
|
|
Current assets
|
$1,800,000
|
Long-term debt
|
$200,000
|
|
Fixed assets
|
$500,000
|
Stockholder's equity
|
$1,000,000
|
|
Total assets
|
$2,300,000
|
Total liabilities'equity
|
$2,300,000
|
Income Statement year ending December 31, 2005
|
Sales
|
$4,000,000
|
|
Expenses interest and taxes
|
$3,700,000
|
|
Net income
|
$300,000
|
a) Using the percentage of sales method, calculate the additional financing Baldwin Products will need over the next year at the $6 million sales level. Show the pro forma balance sheet for the company as of December 31, 2006 assuming a sales level of $6million is reached. Assume that all assets vary proportionally with sales. Accounts payable is the only liability that varies proportionally with sales. Assume that the additional financing needed is obtained in the form of additional notes payable (in other words, assume that notes payable is the 'plug' figure).
b) Suppose that Baldwin Products' management feels the average collection period on its additional sales-that is, sales over $4million-will be 60 days, instead of the current level. By what amount will this increase in the average collection period increase the financing needed by the company over the next year?
c) If Baldwin Products' banker requires the company to maintain a current ratio equal to 1.6 of greater, what is the maximum amount of additional financing that can be in the form of bank borrowings (notes payable)? What other potential sources of financing are available to the company?