As at december 31-2012 a company has total assets of 3500

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As at December 31-2012, a company has total assets of $3,500 {current assets of $1,500 and fixed assets of $2,000}, debt of $2,250 {current liabilities of $1,000 and long-term debt of $1,250} and equity of $1,250 {retained earnings}. For the year ending December 31-2012, total sales were $10,000 and total costs (including taxes) were $7,000.

a) Going forward, if the company experiences a 10% increase in sales, all balance sheet items increase by 10%. What is the firm's dividend payout ratio? With respect to the cost structure the production manager has advised that the margins will remain the same with any increase in sales. What amount of external financing was needed ?

b) If the dividend payout ratio changes to 50%, how does this affect your EFN? Explain/illustrate.

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