1. Baldwin Products Company 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 Company:
Balance Sheet as of December 31, 2005:
Cash - $200,000
Accounts receivable - $400,000
Inventories - $1, 200, 000
Current assets - $1,800, 000
Fixed assets, net - $500,000
Total assets = $2,300,000
Accounts Payable - $600,000
Notes payable - $500,000
Current liabilities - $1,100,000
Long-term debt - $200,000
Stockholder's equity - $1,000,000
Total liabilities and equity = $2,300,000
Income Statement for the Year Ending December 31, 2005
Sales - $4,000
Expenses, including 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 $6 million is reached. Assume that all assets vary 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 the Baldwin Products' management feels that the average collection period on its additional sales -- that is, sales over $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?
c. If the Baldwin 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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