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Calculate: Long-term Financing and Total Debt

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At year-end 2007, total assets for Bertin, Inc. were 1.2 million and accounts payable were $375,000. Sales, which in 2007 were $2.5 million, are expected to increase by 25% in 2008. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Bertin typically uses no current liabilities other than accounts payable. Common stock amounted to $425,000 in 2007, and retained earnings were $295,000. Bertin plans to sell new common stock in the amount of $75,000. The firm's profit margin on sales is 6%; 40% of earnings will be paid out as dividends.

a. What was Bertin's total debt in 2007?

b. How much new, long-term debt financing will be needed in 2008? (Hint: AFN - New Stock = New long-term debt). Do not consider any financing feedback effects.

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Solution Preview

Please see attached file for the calculations.

a. What was Bertin's total debt in 2007?

Total assets = $1,200,000

Current Liabilities (=Accounts payable) = $375,000

Shareholders' equity
Common stock = $425,000
Retained earnings = $295,000
Total shareholders' equity = $720,000 = $425,000 + $295,000.

Total Assets = Current Liabilities + Long Term Debt+ Shareholders' equity
Therefore, Long Term Debt = $105,000 =$1,200,000 - $375,000. - ...

Solution Summary

This solution provides a clear, step by step response which illustrates how to calculate both total debt and long-term debt for the company in question. An Excel file is also attached which outlines the calculations which are required. By clicking on the cells in the Excel file, you can see exactly how the calculations were derived.