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Homework answers / question archive / At year-end 2018, Marvel Company total assets were $4
At year-end 2018, Marvel Company total assets were $4.5 million, and its accounts payable were $850,000. Sales, which in 2018 were $5.5 million, are expected to increase by 25% in 2019. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Marvel typically uses no current liabilities other than accounts payable. Common stock amounted to $ 2.25 million in 2018, and retained earnings were $150,000. Marvel has arranged to sell $25,000 of new common stock in 2019 to meet some of its financing needs. The remainder of its financing needs will be met by issuing new long-term debt at the end of 2019. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its net profit margin on sales is 2.5%, and 55% of earnings will be paid out as dividends.
a. What were Marvel’s total long-term debt and total liabilities in 2018?
b. How much new long-term debt financing will be needed in 2019? (Hint: AFN – New stock = New long-term debt.)
Question
Q a
Assets = $4,500,000
Common stock= $2,250,000
Accounts payable= $850,000
Retained earnings= $150, 000
Long term debts= accounts payable + common + stock retained
= $850,000 + $2,250,000+ $150,000= $3,250,000
Liabilities= $4500000- $3250000 = $1250000
Total liabilities= $1,250,000 + $3,250,000= $4,500,000
Q b
Sales in 2018= $5,500,000
In 2019 there was a 25% rise in sales= $5,500,000*0.25 + $5,500,000= $6,875,000
Total assets increased by 25% = $4,500,000*0.25+ $4,500,000= $5,625,000
Accounts payable increased by 25%= $850,000*0.25+$850,000= $1,062,500
Profit ratio = Profit/ net sales
2.5%= Profit/ $6,875,000
Profit= $171,875
Dividend at 55%= $171,875*0.55= $94,531.25
Profit after dividend= $77,343.75
Total assets= $5,625,000
