The most recent balance sheet for the ADB Distribution Company is shown in the following table. The company is about to embark on an advertising campaign that is expected to raise sales from the current level of $5 million to $7 million by the end of next year. It is currently operating at full capacity and will have to increase its investment in both current and fixed assets to support the projected level of new sales. In fact, the company estimates that both categories of assets will
rise in direct proportion to the projected increase in sales.
ADB Distribution Company, Inc.
Balance Sheet ($ millions)

The firm's net profits were 6 percent of current year's sales but are expected to rise to 7 percent of next year's sales. To help support its anticipated growth in asset needs next year, the firm has suspended plans to pay cash dividends to its stockholders. In past years, a $1.50 per share dividend was paid annually. ADB's 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 next year's operations that are not forthcoming from other sources.
a. Fill in the table and project the firm's needs for discretionary financing. Use notes payable as the balancing entry for future discretionary financing needs.
b. Compare ADB's current ratio (current assets/current liabilities) and debt ratio (total liabilities/total assets) before and after the growth in sales. What is the effect of the expanded sales on these two dimensions of ADB's financial condition?
c. What difference, if any, will result if ADB's sales rise to $6 million in one year and to $7 million only after two years? Discuss only; no calculations are required.

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Percentage of Sales Projected Level Present Level Current assets Net fixed assets Total assets Liabilities and owners" equity $2.0 3.0 $5.0 Accounts payable Accrued expenses Notes payable $0.5 0.5 Total current liabilities $1.0 $2.0 $0.5 1.5 $2.0 $5.0 Long-term debt Common stock Retained earnings Total common equity Total liabilities and owners' equity