Reference no: EM132486029

Karen Lamont is in the process of starting a new business and wants to forecast the first year's income statement and balance sheet. She has made several assumptions, which are shown below:

Point 1: Lamont has projected the firm's sales will be $1 million in the first year.

Point 2: She believes that the operating and gross profit margins will be 20 percent and 50 percent, respectively.

Point 3: For working capital, Lamont has estimated the following:

Point 4: Accounts receivable as a percentage of sales: 12%

Point 5: Inventory as a percentage of sales: 15%

Point 6: Accounts payable as a percentage of sales: 7%

Point 7: Accruals as a percentage of sales: 5%

Point 8: A bank has agreed to loan her $300,000, consisting of $100,000 in short-term debt and $200,000 in long-term debt. Both loans will have an 8 percent interest rate.

Point 9: The firm's tax rate will be 30 percent.

Point 10: Lamont will need to purchase $350,000 in plant and equipment.

Point 11: Lamont will provide any other financing needed.

Question 1: If her estimates in Situation 3 are correct, what will be the firm's current ratio and debt ratio? Explain the meaning of these ratios.