Textbook Problem

LONG-TERM FINANCING NEEDED At year-end 2015, total assets for Ambrose Inc. were $1 2 million and accounts payable were $375,000. Sales, which in 2015 were $2 5 million, are expected to increase by 25% in 2016. Total assets and accounts payable are proportional to sales, and that relationship will be maintained; that is, they will grow at the same rate as sales. Ambrose typically uses no current liabilities other than accounts payable. Common stock amounted to $425,000 in 2015, and retained earnings were $295,000. Ambrose plans to sell new common stock in the amount of $75,000. The firm’s profit margin on sales is 6%; 60% of earnings will be retained.

1. a. What were Ambrose’s total liabilities in 2015?
2. b. How much new long-term debt financing will be needed in 2016? (Hint: AFN − New stock = New long term debt.)