| Major Manuscripts, Inc. 2009 Income Statement |
| Earnings before interest and taxes | 805 |
| Major Manuscripts, Inc. 2009 Balance Sheet |
| Cash | 2,150 | | Accounts payable | 1,600 |
| Accounts rec. | 850 | | Long-term debt | 270 |
| Inventory | 2,300 | | Common stock | 2,600 |
| Total | 5,300 | | Retained earnings | 3,860 |
| Total assets | 8,330 | | Total liabilities & equity | 8,330 |
Major Manuscripts, Inc. is currently operating at maximum capacity. All costs, assets, and current liabilities vary directly with sales. The tax rate and the dividend payout ratio will remain constant. How much additional debt is required if no new equity is raised and sales are projected to increase by 10 percent? HINT: Start by calculating the growth in assets. Now we need to figure out how we will pay for the growth. Start by subtracting off from that needed amount of new assets the estimated growth in internal equity (that it, the new retained earnings that will be used to purchase some of those new assets). Since current liabilities also grow proportional to sales in this problem, also subtract off the estimated growth in current liabilities (used to finance the purchase of current assets). Whatever amount is left over is what we must raise in new, long-term debt.
