PROBLEM 2. Morrissey Technologies Inc.s 2008 Financial Statements are shown below:

Morrissey Technologies, Inc.

Income Statement

For the year ended December 31, 2008

Sales		P 3,600,000
Operating costs including depreciation		3,279,720
EBIT		P 320,280
Interest		20,280
EBT		P 300,000
Taxes (40%)		120,000
Net Income		P 180,000

Per share data:

Common stock price P 45.00

EPS 1.80

DPS 1.08

Morrissey Technologies, Inc.

Balance Sheet

December 31, 2008

Assets

Cash		P 180,000
Accounts receivable		360,000
Inventory		720,000
Total current assets		P 1,260,000
Fixed assets		1,440,000
Total assets		P 2,700,000

Liabilities and Equity

Accounts payable		P 360,000
Notes payable		56,000
Accrued liabilities		180,000
Total current liabilities		P 596,000
Long-term Debt		100,000
Total Liabilities		P 696,000
Ordinary Shares		1,800,000
Retained Earnings		204,000
Total Liabilities and Equity		P 2,700,000

Suppose that in 2009, sales increase by 10% over 2008 sales. The firm currently has 100,000 shares outstanding. It expects to maintain its 2008 dividend payout ratio and believes that its assets should grow at the same rate as sales. The firm has no excess capacity. However, the firm would like to reduce its operating costs-to-sales ratio to 87.5% and increase its total debt ratio to 30%. The firm will raise 30% of 2009 forecasted total debt as notes payable, and it will issue long-term bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short-term and long-term debt) is 12.5% Assume that any common stock issuances or repurchases can be made at the firms current stock price of P45.

REQUIRED:

• Using the percent-of sales/pro-forma financial statement method, determine whether the company has external financing needs or a surplus of funds. If it needs external financing, consider making a financial feedback up to three revisions (passes).