Your company, Martin Industries, Inc., has experienced a higher than expected demand for its new product line. The company plans to expand its operation by 25% by spending $5,000,000 for an additional building.

The firm would like to maintain its 40% debt to total asset ratio in its capital structure and its dividend payout ratio of 50% of net income. Last year, net income was $2,500,000.

Required:

1. What are retained earnings for last year?
2. How much debt will be needed for the new project?
3. How much external equity must Martin use at the beginning of this year in order to finance the new expansion?
4. If Martin decides to retain all earnings for the coming year, how much external equity will be required?

Part Two: The Degree of Leverage

Assume that two companies, Brake, Inc. and Carbo, Inc., have the following operating results:

	Brake, Inc.	Carbo, Inc.
Sales	$300,000	$300,000
Variable Costs	60,000	180,000
Fixed Costs	210,000	90,000
Operating Income	$30,000	$30,000