Question 1 At Year End 2018: Marvel Company's Total Assets ✓ Solved

Question 1at Year End 2018 Marvel Company Total Assets Were 45 Mill

Question 1: At year-end 2018, Marvel Company’s total assets were $4.5 million, and its accounts payable were $850,000. Sales in 2018 were $5.5 million, expected to increase by 25% in 2019. Total assets and accounts payable are proportional to sales, and this 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. The remainder of its financing needs will be met by issuing new long-term debt at the end of 2019. Its net profit margin on sales is 2.5%, and 55% of earnings will be paid out as dividends.

Questions:

1. What were Marvel’s total long-term debt and total liabilities in 2018?
2. How much new long-term debt financing will be needed in 2019? (Hint: AFN – New stock = New long-term debt.)

Sample Paper For Above instruction

Introduction

This analysis examines Marvel Company's financial position at the end of 2018, focusing on its liabilities, assets, and financing needs forecasted for 2019. Through detailed calculations, we explore the company's liabilities, long-term debt requirements, and the impact of projected sales growth on its financial structure.

Part A: Total Long-Term Debt and Total Liabilities in 2018

To determine Marvel’s total liabilities and long-term debt in 2018, we start with the given data: total assets were $4.5 million, and accounts payable (a current liability) was $850,000. Since Marvel uses no other current liabilities, total current liabilities equal accounts payable.

In a typical corporate balance sheet, total liabilities include current liabilities and long-term liabilities. To find total liabilities, we need to estimate or derive the long-term liabilities.

Assuming that total assets are financed by liabilities and equity, and considering the equity figures, we proceed as follows:

• Stockholders’ equity = Common stock + Retained earnings = $2.25 million + $150,000 = $2.4 million.
• Assets = Liabilities + Equity, so:
• Total liabilities = Assets – Equity = $4.5 million – $2.4 million = $2.1 million.

Given that total liabilities include current liabilities ($850,000) and long-term liabilities, we can calculate:

• Long-term liabilities = Total liabilities – Current liabilities = $2.1 million – $850,000 = $1.25 million.

Answer: Marvel’s total liabilities in 2018 were $2.1 million, with long-term debt amounting to approximately $1.25 million.

Part B: Forecasted Additional Long-Term Debt in 2019

Projected sales in 2018 were $5.5 million, expected to increase by 25% in 2019, resulting in predicted sales of:

Sales 2019 = $5.5 million × 1.25 = $6.875 million.

Since total assets and accounts payable are proportional to sales, we determine the 2019 assets as:

Assets 2019 = Assets 2018 × (Sales 2019 / Sales 2018) = $4.5 million × (6.875 / 5.5) ≈ $4.5 million × 1.25 = $5.625 million.

Accounts payable in 2019 will also increase proportionally:

Accounts payable 2019 = $850,000 × 1.25 = $1,062,500.

To determine the financing needed, we first calculate the increase in total assets:

Increase in assets = $5.625 million – $4.5 million = $1.125 million.

Next, we estimate the addition to retained earnings based on net profit:

Net profit margin = 2.5%, so net income in 2019 depends on sales:

Net income = $6.875 million × 2.5% = $171,875.

Retained earnings increase = 45% of net income (since 55% distributed as dividends), so:

Retained earnings increase = $171,875 × 45% ≈ $77,344.

Assuming no dividends are paid on the new stock issue, the retained earnings at year-end will increase by this amount, expanding equity. The additional retained earnings can offset some of the growth in assets, but since the question asks for additional debt, we assess the need for external financing.

• New stock issuance = $25,000.
• The remaining financing needed, after considering retained earnings, is:

— Total increase in assets = $1,125,000

— Less: increase in retained earnings = $77,344

— Less: new stock issued = $25,000

— Remaining amount to be financed = $1,125,000 – $77,344 – $25,000 ≈ $1,022,656

Therefore, the new long-term debt financing required in 2019 will be approximately $1,022,656.

Answer: Marvel needs approximately $1,022,656 in new long-term debt financing in 2019.

Conclusion

This detailed financial assessment highlights Marvel’s liabilities at the end of 2018 and projects its long-term debt needs for 2019 based on forecasted sales growth and financial policy assumptions.

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