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 inc...