Case Scenario:
Baldwin Products Company anticipates reaching a sales level of $6million 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 Company 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, net
|
500,000
|
|
Stockholders' equity
|
1,000,000
|
|
|
Total Assets
|
$2,300,000
|
|
Total Liabilities and equity
|
2,300,000
|
Baldwin Products Company anticipates reaching a sales level of $6million 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 Company Balance sheet as of December 31, 2005
|
Income Statement for the year ending December 31, 2005
|
|
Sales
|
|
|
|
$4,000,000
|
|
Expense, including interest and taxes
|
3,700,000
|
|
Net Income
|
|
|
300,000
|
Q1. Using the percentage of sales method, calculate the additional financing Baldwin Products will need over the next year at the $6million sales level. Show the pro form balance sheet for the company as of December 31, 2006, assuming a sales level of 6 million dollars 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 additional notes payable. (In other words, assume that notes payable is the "plug" figure).
Q2. Suppose that the Baldwin Products' management feels that the average collection period on its additional sales-that is, sales over 4 million dollars-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?
Q3. If the Baldwin Products' banker requires the company to maintain a current ratio to 1.6 or greater, what is the maximum amount of additional financing that can be in the form of the bank borrowings (notes payable)? What other potential source of financing are available to the company?