EXCESS CAPACITY Krogh Lumber's 2018 financial statements are shown here.

Krogh Lumber: Balance Sheet as of December 31, 2018 (Thousands of Dollars)

Cash $ 1,800 Accounts payable $ 7,200

Receivables 10,800 Accrued liabilities 2,520

Inventories 12,600 Notes payable 3,472

Total current assets $25,200 Total current liabilities $13,192

Mortgage bonds 5,000

Net fixed assets 21,600 Common stock 2,000

Retained earnings 26,608

Total assets $46,800 Total liabilities and equity $46,800

Krogh Lumber: Income Statement for December 31, 2018 (Thousands of Dollars)

Sales $36,000

Operating costs including depreciation 30,783

Earnings before interest and taxes $ 5,217

Interest 1,017

Earnings before taxes $ 4,200

Taxes (40%) 1,680

Net income $ 2,520

Dividends (60%) $ 1,512

Addition to retained earnings $ 1,008

a. Assume that the company was operating at full capacity in 2018 with regard to all

items except fixed assets; fixed assets in 2018 were being utilized to only 75% of capacity.

By what percentage could 2019 sales increase over 2018 sales without the need for

an increase in fixed assets?

b. Now suppose 2019 sales increase by 25% over 2018 sales. Assume that Krogh cannot

sell any fixed assets. All assets other than fixed assets will grow at the same

rate as sales; however, after reviewing industry averages, the firm would like to

reduce its operating costs/sales ratio to 82% and increase its total liabilities-to assets

ratio to 42%. The firm will maintain its 60% dividend payout ratio, and it

currently has 1 million shares outstanding. The firm plans to raise 35% of its 2019

forecasted interest-bearing debt as notes payable, and it will issue bonds for the

remainder. The firm forecasts that its before-tax cost of debt (which includes both

short- and long-term debt) is 11%. Any stock issuances or repurchases will be

made at the firm's current stock price of $40. Develop Krogh's projected financial

statements. What are the balances of notes payable,

bonds, common stock, and retained earnings?