a. Suppose that current assets, costs, and accounts payable maintain a constant ratio to sales.
The firm retains 40% of earnings.
i. If the firm is producing at full capacity, what is the total external financing needed if sales
increase 25%, assuming fixed assets increase proportionately with sales.
ii. If the firm is producing at only 90% capacity, describe how this would impact your
answer. You don't need to do a calculation, but it may help you to explain your reasoning.
b.. Suppose the firm wishes to maintain a constant debt-equity ratio, retains 60% of net
income, and raises no new equity. Assets and costs maintain a constant ratio to sales. What
is the maximum increase in sales the firm can achieve?

Radical Co. Balance Sheet Accounts payable Notes payable Long-term debt $100 Cash $150 Fixed assets $600 Inventory 100 350 250 Equity Total assets $800 Total liabilities & equity $800 Radical Co. Income statement Sales $800 Costs 600 EBT $200 es (34%) Net income 68 $132