Suppose that current assets, costs, and accounts payable maintain a constant ratio to sales.

Radical Co.
Balance Sheet
Cash $ 50 Accounts payable $100
Inventory $150 Notes payable 100
Fixed assets $600 Long-term debt 350
Equity 250
Total assets $800 Total liabilities & equity $800
Radical Co.
Income statement
Sales $800
Costs 600
EBT $200
Taxes (34%) 68
Net income $132
a. Suppose that current assets, costs, and accounts payable maintain a constant ratio to sales. The firm retains 40% of earnings.
i. If the firm is producing at full capacity, what is the total external financing needed if sales increase 25%, assuming fixed assets increase proportionately with sales (4 marks)?
ii. If the firm is producing at only 90% capacity, describe how this would impact your answer. You don’t need to do a calculation, but it may help you to explain your reasoning. (3 marks)
b.. Suppose the firm wishes to maintain a constant debt-equity ratio, retains 60% of net income, and raises no new equity. Assets and costs maintain a constant ratio to sales. What is the maximum increase in sales the firm can achieve? 

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