Morrissey Technologies Inc.’s 2005 financial statements are shown here.

Morrissey Technologies Inc.: Balance Sheet as of December 31, 2005.

a. Suppose that in 2006 sales increase by 10 percent over 2005 sales and that 2006 DPS will increase to $1.12. Construct the pro forma financial statements using the projected financial statement method. Use AFN to balance the pro forma balance sheet. How much additional capital will be required? Assume the firm operated at full capacity in 2005.

b. If the profit margin were to remain at 5 percent and the dividend payout rate were to remain at 60 percent, at what growth rate in sales would the additional financing requirements be exactly zero? (Hint: Set AFN equal to zero and solve for g.

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Cash Receivables Inventories Accounts payable Notes payable Accrued liabilities Total current liabilities Common stock Retained earnings Total liabilities and equity $ 180,000 $ 360,000 360,000 156,000 720,000 180,000 $ 696,000 1,800,000 Total current assets Fixed assets $1,260,000 1,440,000 204,000 Total assets $2,700,000 $2,700,000 Morrissey Technologies Inc.: Income Statement for December 31, 2005 Sales $3,600,000 Operating costs 3,279,720 EBIT $ 320,280 Interest 20,280 $ 300,000 120,000 EBT Taxes (40%) Net Income $ 180,000 Per Share Data: Common stock price Earnings per share (EPS) Dividends per share (DPS) $24.00 $ 1.80 $ 1.08