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a. Suppose 2011 sales are projected to increase by 15% over 2010 sales. Use the forecasted
financial statement method to forecast a balance sheet and income statement for December 31,
2011. The interest rate on all debt is 10%, and cash earns no interest income. Assume that all
additional debt is added at the end of the year, which means that you should base the
forecasted interest expense on the balance of debt at the beginning of the year. Use the
forecasted income statement to determine the addition to retained earnings. Assume that the
company was operating at full capacity in 2010, that it cannot sell off any of its fixed assets, and
that any required financing will be borrowed as notes payable. Also, assume that assets,
spontaneous liabilities, and operating costs are expected to increase by the same percentage
as sales. Determine the additional funds needed.
b. What is the resulting total forecasted amount of notes payable?
c. In your answers to Parts a and b, you should not have charged any interest on the additional
debt added during 2011 because it was assumed that the new debt was added at the end of the
year. But now suppose that the new debt is added throughout the year. Don’t do any
calculations, but how would this change the answers to parts a andb?
ANSWER
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