RumpRetail is about to embark on an advertising campaign which is expected to increase sales from the current level of $5 million to $7 million by the end of next year and by a similar amount in the following year. The firm is currently operating at full capacity and will have to increase its investment in both current and fixed assets to support the projected level of new sales. In fact, the firm estimates that both categories of assets will rise in direct proportion to the projected increase in sales. The firms net profit was 6% of current years sales but is expected to rise to 7% of sales for the next two years. To help support its anticipated growth in asset needs, the firm plans to not pay cash dividends to its shareholders. In past years, a $1.50 per share dividend was paid annually. RumpRetails payables and accrued expenses are expected to vary directly with sales. In addition, notes payable will be used to supply the funds needed to finance operations that are not forthcoming from other sources. RumpRetail Balance Sheet Year ended 30 June 2020 Assets

Current assets 2 000 000

Net fixed assets 3 000 000

Total assets 5 000 000

Liabilities and shareholders equity

Accounts payable 500 000

Accrued expenses 500 000

Notes payable 0

Current liabilities 1 000 000

Long-term debt 2 000 000

Total liabilities 3 000 000

Ordinary shares 500 000

Retained earnings 1 500 000

Shareholders equity 2 000 000

Total liabilities and shareholders equity 5 000 000 Required:

(a) Based on the projected growth in sales, develop pro-forma balance sheets for the 2020-21 and 2021-22 financial years.

(b) Based on the 2020 balance sheet given above, calculate: External Funds Needed Internal Growth Rate Sustainable Growth Rate

(c) Compare the companys Current Ratio (Current Assets/Current Liabilities) and Debt Ratio (Total Liabilities/Total Assets) before and after the growth in sales and discuss the impact on, and implications for, the companys financial condition.

(d) Discuss considerations associated with dividend policy and capital structure policy that might be relevant for the companys proposed financing strategy.

(e) Discuss what impact, if any, would result if the companys sales rise to only $6 million in 2020-21 and then to $7 million in $2021-22.