MC Qu. 62 Major Manuscripts, Inc. is currently operating at maximum ... Major Ma

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MC Qu. 62 Major Manuscripts, Inc. is currently operating at maximum ...

Major Manuscripts, Inc. 2009 Income Statement

Net sales 7,600
Cost of goods sold 6,715
Depreciation 190
Earnings before interest and taxes 695
Interest paid 20
Taxable Income 676
Taxes 235
Net income 440
Dividends 198

Major Manuscripts, Inc. 2009 Balance Sheet
2009 2009
Cash 2,200 Accounts payable 1,650
Accounts rec. 850 Long-term debt 260
Inventory 2,300 Common stock 2,500
Total 5,350 Retained earnings 4,190
Net fixed assets 3,250
Total assets 8,600 Total liabilities & equity 8,600

Major Manuscripts, Inc. is currently operating at maximum capacity. 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 10 percent? HINT: Start by calculating the growth in assets. Now we need to figure out how we will pay for the growth. Start by subtracting off from that needed amount of new assets the estimated growth in internal equity (that it, the new retained earnings that will be used to purchase some of those new assets). Since current liabilities also grow proportional to sales in this problem, also subtract off the estimated growth in current liabilities (used to finance the purchase of current assets). Whatever amount is left over is what we must raise in new, long-term debt.


A) 260
B) 429
C) 689
D) 24
E) 286

Explanation / Answer

The sales are growing at 10%. The remaining assets are also growing with sales. New assets are 110% on old assets. New assets   = 110%*(8,600)                    = 9,460 Less: Total growth in internal equity from the assets.       The internal equity is 110%*6,690                                     = 7359                                     = 7359                                     = 9,460 - 7,359                                     =2101 The growth in current liablilities is 110 over old current liabilities.                                                 = 110%*1,650                                                 = 1,815 We have to subtract the this figure from the above figure then we can get the raise amount in new long-term debt.                                                 = 2,101 - 1,815                                                 = 286 Therefore the amount raised for long-term debt is 286. This is matched with option E. We have to subtract the this figure from the above figure then we can get the raise amount in new long-term debt.                                                 = 2,101 - 1,815                                                 = 286 Therefore the amount raised for long-term debt is 286. This is matched with option E.

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