The firm earned $7,000 in sales last year while selling 20,000 units. Net Income that same year was $850. At the end of that same year, the Balance Sheet reflected $11,000 in total assets, having $3,500 in debt and $7,500 in equity accounts. The firm expects to sell 25% more units over the coming year, and they expect their profit margin to be the same as last year, and they expect that the Sales/Assets ratio will also remain constant.

In the problem above, the firm has decided that to get the 25% increase in Sales, that it will need to expand Assets by 40%. Again, profit margin is expected to remain constant.

What will next year’s Assets be at the end of the year?

If the firm dividend out all of its earnings to shareholders, and no new debt is issued, no current debt is retired, and no currently outstanding stock is retired, how much in new stock will the firm need to issue to finance the new assets?

In the case above, what will be the new D/E ratio?