Debentures

| December 10, 2015

At year-end 2012, total assets for Shome Inc. were $1.2 million and accounts payable were $375,000. Sales, which in 2012 were 2.5 million, are expected to increase by 25% in 2013. Total assets and accounts payable are proportional to sales and that relationship will be maintained. Shome typically uses no current liabilities other than accounts payable. Common stock amounted to $425,000 in 2012. and retained earnings were $295,000. Shome plans to sell new common stock in the amount of $75,000. The firm’s profit margin on sales is 6%, and 40% of earnings will be paid out as dividends.

1. What was Shome’s total debt in 2012?

2. How much new long-term debt financing will be needed in 2013.

(Hint: AFN – New Stock = New long-term debt) **Assume that Shome operated at full-capacity in 2012, and do not consider any financing feedback efforts.

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operational management
cost of capital

Category: Finance

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