Morrissey Technologies Inc.’s 2021 financial statements are shown here.

Suppose that in 2022, sales increase by 10% over 2021 sales. The firm currently has 100,000 shares outstanding. It expects to maintain its 2021 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/sales ratio to 87.5% and increase its total liabilities-to-assets ratio to 30%. (It believes its liabilities-to-assets ratio currently is too low relative to the industry average.) The firm will raise 30% of the 2022 forecasted interest-bearing 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- and long-term debt) is 12.5%. Assume that any common stock issuances or repurchases can be made at the firm’s current stock price of $45.

a. Construct the forecasted financial statements assuming that these changes are made.
What are the firm’s forecasted notes payable and long-term debt balances? What is the forecasted addition to retained earnings?

b. If the profit margin remains at 6.25% and the dividend payout ratio remains at 60%, at what growth rate in sales will the additional financing requirements be exactly zero?
In other words, what is the firm’s sustainable growth rate?

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Morrissey Technologies Inc.: Balance Sheet as of December 31, 2021 Cash $ 180,000 Accounts payable 360,000 Accrued liabilities 720,000 $1,260,000 Receivables Inventories Total current assets Fixed assets Total assets Notes payable Total current liabilities Long-term debt 1,440,000 Common stock Retained earnings $2,700,000 Total liabilities and equity $360,000 180,000 56,000 $ 596,000 100,000 1,800,000 204,000 $2,700,000 Morrissey Technologies Inc.: Income Statement for December 31, 2021 Sales $3,600,000 Operating costs including depreciation 3,279,720 EBIT $ 320,280 Interest 20,280 EBT $ 300,000 Taxes (25%) 75,000 Net income $ 225,000 Per share data: Common stock price Earnings per share (EPS) Dividends per share (DPS) $45.00 $ 2.25 $ 1.35