I am in a 440 Financial Analysis class working on a case study. I am working on calculating the answer to the following question:

3) If Mason decides to keep the debt-equity ratio constant, up to what rate of growth in revenue can the firm support? What assumptions are necessary when calculating this rate of growth? Are these assumptions realistic in the case of Oats R Us? Explain.

Case:

We are growing too fast, said Mason. I know I shouldnt complain, but we better have the capacity to fill the orders or well be hurting ourselves. Vicky and Mason Coleman started their oatmeal snacks company in 1998, upon suggestions of their close friends who simply loved the way their oatmeal tasted.

After considerable help from local retailers and a sponsorship by a major bread company their firm, Oats R Us, was established in 1998 and reached sales of over $4 million by 2004. Given the current trend of eating healthy snacks and keeping fit, Mason was confident that sales would increase significantly over the next few years. The industry growth forecast had been estimated at 30% per year and Mason was confident that his firm would be able to at least achieve if not beat that rate of sales growth.

Mason immediately called the treasurer, Jim, I need to know how much additional funding we are going to need for next year, said Mason. The growth rate of revenues should be between 25% and 40%. I would really appreciate if you can have the forecast on my desk by early next week.

He asked the accounting department to give him the last three years financial statements (see excel document) and got to work.

Oats 'R' Us
Income Statement for Year Ended Dec. 31st 2004
			2004	2003	2002
Sales			$4,700,000	$3,760,000	$3,000,000
Cost of Goods Sold			$3,877,500	$3,045,600	$2,400,000
Gross Profit			$822,500	$714,400	$600,000
Selling, General & Admin. Expenses			$275,000	$250,000	$215,000
Fixed Expenses			$90,000	$90,000	$90,000
Depreciation Expense			$25,000	$25,000	$25,000
EBIT			$432,500	$349,400	$270,000
Interest Expense			$66,000	$66,000	$66,000
EBT			$366,500	$283,400	$204,000
Taxes @ 40%			$146,600	$113,360	$81,600
Net Income			$219,900	$170,040	$122,400
Retained Earnings			$131,940	$102,024	$73,440

Oats 'R' Us
Balance Sheet for Year Ended Dec. 31st 2004
			2004	2003	2002
Assets
Current Assets
Cash and cash equivalents			$60,000	$97,376	$48,000
Accounts recievable			$250,416	$175,000	$150,000
Inventory			$511,500	$390,000	$335,000
Total Current Assets			$821,916	$662,376	$533,000
Non-Current Assets
Plant & Equipment			$560,000	$560,000	$560,000
Accumulated depreciation			$175,000	$150,000	$125,000
Net Plant & Equipment			$385,000	$410,000	$435,000
Total Assets			$1,206,916	$1,072,376	$968,000
Liabilities and Equities
Current Liabilities
Accounts Payable			$135,000	$151,352	$128,000
Notes Payable			$275,000	$275,000	$250,000
Other Current Liabilities			$43,952	$50,000	$46,000
Total Current Liabilities			$453,952	$476,352	$424,000
Non-Current Liabilities
Long-term Debt			$275,000	$250,000	$300,000
Total Liabilities			$728,952	$726,352	$724,000
Owner's Capital			$155,560	$155,560	$155,560
Retained Earnings			$322,404	$190,464	$88,440
Total Liabilities and Owner's Equity			$1,206,916	$1,072,376	$968,000