a) Using the percentage of sales method, calculate the additional financing Bulawayo Products will need over the next year at the Sh.6 million sales level. Show the pro forma balance sheet for the company as of December 31, 2020, assuming that a sales level of Sh.6 million is reached. Assume that the additional financing needed is obtained in the form of additional notes payable. b) Suppose that the Bulawayo Products’ management feels that the average collection period on its additional sales-that is, sales over Sh.4 million-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? 5 c) If the Bulawayo Products’ banker requires the company to maintain a current ratio equal to 1.6 or 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?
Bulawayo Products Company anticipates reaching a sales level of Sh.6 million in one year.
The company expects earnings after taxes during the next year to equal Sh.400,000. During the
past several years, the company has been paying Sh.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 2019 follow.
Bulawayo Products Company Balance Sheet as of December 31, 2019
Cash Sh. 200,000 Accounts payable Sh. 600,000
Accounts receivable 400,000 Notes payable 500,000
Inventories 1,200,000 Long-term debt 200,000
Fixed assets, net 500,000
Total assets Sh.2,300,000 Total liabilities and equity Sh. 2,300,000
Income Statement for the year Ending December 31, 2019
Sales Sh. 4,000,000
Expenses, including interest and taxes Sh.3,700,000
Earnings after taxes Sh. 300,000
Required:
a) Using the percentage of sales method, calculate the additional financing Bulawayo
Products will need over the next year at the Sh.6 million sales level. Show the pro
forma balance sheet for the company as of December 31, 2020, assuming that a sales
level of Sh.6 million is reached. Assume that the additional financing needed is obtained
in the form of additional notes payable.
b) Suppose that the Bulawayo Products’ management feels that the average collection
period on its additional sales-that is, sales over Sh.4 million-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?
5
c) If the Bulawayo Products’ banker requires the company to maintain a current ratio equal
to 1.6 or 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?
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