Last year$$s balance sheet and income statement for the Lewis Company are shown below. The firm operated at full capacity. It expects sales to increase by $20$ percent during this year and expects this year$$s dividends per share to increase to $$1\mathrm{.}10.$

a$.$ Use percent of sales method $($i$.$e$.,$ constant ratio method$)$ to determine how much outside financing is required, by developing the firm$$s pro forma balance sheet and income statement, and using the AFN $($additional funds needed$)$ as the balancing item. This means that the AFN Equation should not be used in answering this part of the problem.

b$.$ If the firm must maintain a $$current ratio$$ of $2\mathrm{.}3$ and a $$total liabilities to total assets$$ ratio of $40$ percent, how much financing will be obtained using notes payable, long$-$term debt, and common stock?

Balance Sheet Income Statement

Cash $80$ Sales $8,000$

Accounts receivable $240$ Operating costs $7,450$

Inventory $720$ EBIT $550$

Net fixed assets $3,200$ Interest expense $150$

Total assets $4,240$ EBT $400$

Taxes @ $40\%160$

Accounts payable $160$ Net income $240$

Notes payable $252$

Accruals $40$ Per Share Data

Long$-$term debt $1,244$ Share price $16\mathrm{.}96$

Common stocks $1,605$ Earnings per share $($EPS$)1\mathrm{.}60$

Retained earnings $939$ Dividends per share $($DPS$)1\mathrm{.}04$

Total liabilities and equity $4,240$

Pro Forma Income Statement

Sales, cost and other variable accounts are expected to increase by $20\%$

Taxes remain $40\%$

New Value $=$ Old Value$*(1+$GrowthRate$)$

Item Current Amount Growth Rate Pro Forma Amount

sales $ $800020\%$ $$9,600$

Operating Costs $ $7,45020\%$ $$8,940$

EBIT $$55020\%$ $$660$

Interest Expense $$1500\%$ $$150\mathrm{.}00$

EBT $$400$ $$510$

Taxes @ $40\%$ $$160$ $$204$

Net Income $$240$ $$306$

b$)$ Total Assets $=$ $$4240=4240*1\mathrm{.}2=5,088$

Total Liabilities and Equity $=$ $$4,240$

Current assets $=80*1\mathrm{.}2=96$

Accounts receivable $=240*1\mathrm{.}2=288,$ Inventory $=720*1\mathrm{.}2=864$

Total current assets $=96+288+864=1,248$

Current Liabilities

Accounts payable $=160*1\mathrm{.}2=192$

Notes payable $=252*1\mathrm{.}2=302\mathrm{.}4$

Accruals $=40*1\mathrm{.}2=48$

Total current liabilities $=192+302\mathrm{.}4+48=542\mathrm{.}4$

Long term debt $=1,492\mathrm{.}8$

Equity:

Common stock $=1,605*1\mathrm{.}2=1,926$

Retained earnings $=939+(306-(1\mathrm{.}10*150))=1,080$

Total Liabilities and equity:

Total Liabilities $=542\mathrm{.}4+1,492\mathrm{.}8=2,035\mathrm{.}2$

Total equity $=1,926+1,080=3,006$

$=2,035\mathrm{.}2+3,006=5,041\mathrm{.}2$

AFN $($Additional Funds Needed$)=$ Total Assets Pro Forma $$ Total Liabilities and Equity Pro Forma

$=$ $$5088-$ $$5041\mathrm{.}2$

$=$ $$46\mathrm{.}8$

To maintain the specified financial ratios:

Current ratio: To achieve current ratio $2\mathrm{.}3$ current assets and liabilities must be adjusted accordingly

Total Liabilities to Total assets ratio: The target is $40\%$ which would imply total liabilities of $40\%*$ $$5088=$ $$2,035\mathrm{.}2$

$$46\mathrm{.}8$ more in funding will be needed by The Lewis Company to support a $20\%$ increase in sales. This means that the mix of notes payable, long$-$term debt, and equity financing may need to be adjusted in order to maintain a current ratio of $2\mathrm{.}3$ and a total liability to total assets ratio of $40\%.$ Financial structure modifications should secure the necessary funding for expansion while guaranteeing adherence to these financial health metrics.

Is this correcct