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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a) To calculate the additional financing Baldwin Products will need over the next year at the $6 million sales level using the percentage of sales method, we need to determine the change in each account on the balance sheet as a percentage of sales.

First, let's calculate the percentage of sales for each account:

Cash = 2% of Sales ($200,000 / $4,000,000)
Accounts receivable = 10% of Sales ($400,000 / $4,000,000)
Inventories = 30% of Sales ($1,200,000 / $4,000,000)
Fixed assets, net = 12.5% of Sales ($500,000 / $4,000,000)
Accounts payable = 15% of Sales ($600,000 / $4,000,000)
Notes payable = Will be determined as the "plug" figure

Next, we need to calculate the change in each account based on the increase in sales from $4 million to $6 million:

Cash: 2% of $6 million - 2% of $4 million = $120,000
Accounts receivable: 10% of $6 million - 10% of $4 million = $200,000
Inventories: 30% of $6 million - 30% of $4 million = $600,000
Fixed assets, net: 12.5% of $6 million - 12.5% of $4 million = $250,000
Accounts payable: 15% of $6 million - 15% of $4 million = $300,000

Now, we can calculate the additional financing needed, which will be the change in notes payable:

Notes payable = Increase in assets - Increase in liabilities - Increase in equity
Notes payable = ($120,000 + $200,000 + $600,000 + $250,000) - ($300,000) - (Net income - Dividends)
Notes payable = $1,170,000 - $300,000 - ($400,000 - $50,000)
Notes payable = $1,170,000 - $300,000 - $350,000
Notes payable = $520,000

The pro forma balance sheet for December 31, 2006, with a sales level of $6 million, would be:

Balance Sheet as of December 31, 2006:

Cash: $200,000 + $120,000 = $320,000
Accounts receivable: $400,000 + $200,000 = $600,000
Inventories: $1,200,000 + $600,000 = $1,800,000
Current assets: $1,800,000 + $320,000 = $2,120,000
Fixed assets, net: $500,000 + $250,000 = $750,000
Total assets: $2,300,000 + $750,000 = $3,050,000

Accounts payable: $600,000 + $300,000 = $900,000
Notes payable: $500,000 (plug figure)
Current liabilities: $1,100,000 + $300,000 = $1,400,000
Long-term debt: $200,000
Stockholder's equity: $1,000,000 - ($400,000 - $50,000) = $650,000
Total liabilities and equity: $2,300,000 + $750,000 = $3,050,000

b) If the average collection period for additional sales is increased to 60 days, we need to calculate the change in accounts receivable:

Change in accounts receivable = (Additional sales / 365) * Change in average collection period

Additional sales = $6 million - $4 million = $2 million

Change in accounts receivable = ($2,000,000 / 365) * (60 - 30)
Change in accounts receivable = $10,959. The financing needed by the company over the next year will increase by $10,959 due to the increased average collection period.

c) To determine the maximum amount of additional financing that can be in the form of bank borrowings (notes payable) while maintaining a current ratio of at least 1.6, we need to calculate the current assets and current liabilities based on the $6 million sales level:

Current assets = Cash + Accounts receivable + Inventories
Current assets = $320,000 + $600,000 + $1,800,000 = $2,720,000

Current liabilities = Accounts payable
Current liabilities = $900,000

Current ratio = Current assets / Current liabilities

1.6 = $2,720,000 / Current liabilities

Current liabilities = $2,720,000 / 1.6
Current liabilities = $1,700,000

Therefore, the maximum amount of additional financing in the form of bank borrowings (notes payable) is:

Maximum notes payable = Current liabilities - Notes payable
Maximum notes payable = $1,700,000 - $900,000
Maximum notes payable = $800,000

Other potential sources of financing available to the company could include issuing additional equity, obtaining long-term debt, or securing financing through other lenders or investors.