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8 June, 19:32

Wilson is currently operating at maximum capacity. The firm has a net income of $2,250, total assets of $24,600, long-term debt of $9,800, accounts payable of $2,700, dividends of $900, and total equity of $12,100. All costs, assets, and current liabilities vary directly with sales. The tax rate and the dividend payout ratio will remain constant. How much additional debt is required if no new equity is raised and sales are projected to increase by 5 percent?

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  1. 8 June, 20:25
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    As a result in the increase in sales, the firm debt will decrease by 187.5 dollars

    Explanation:

    income of 2,250

    dividends of 900

    payout ratio: 900/2,250 = 0.4

    income will increase by 5%

    2,250 x 1.05 = 2,362.5‬

    retained earnings break even:

    2,362.5 x (1 - 0.4) = 1,417.5

    increase in assets:

    24,600 x 0.05 = 1,230

    now we post this into the accounting equation:

    Assets = liab + equity

    +1,230 = liab + 1,417.5

    liab = - 187.5
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