If LaPearla’s long-term debt and paid-in capital accounts remain at their 2005 levels, the tax rate remains at the 2005 rate, and all other income statement and balance sheet accounts are sales-driven with an expected growth rate of revenues of 10%, in 2006 LaPearla will have a financing:
LaPearla Company Income Statement
for Year 2005 (in millions)
LaPearla Company Balance Sheet,
End of Year 2005 (in millions)
Revenues h10,000 Current assets h2,000
Cost of goods sold 5,500 Net plant and equipment 18,000
Gross profit h4,500 Total assets h20,000
Selling, general, and
administrative expenses 800
Operating income h3,700 Current liabilities h1,000
Interest expense 500 Long-term debt 5,000
Earnings before taxes h3,200 Common stock and paid-in capital 500
Taxes 960 Retained earnings 13,500
Net income h2,240 Total liabilities and equity h20,000
A. deficiency if it pays no dividends.
B. surplus if it pays out 50% of its net income in dividends.
C. deficiency if it pays out 50% of its net income in dividends.
Ans: C. deficiency if it pays out 50% of its net income in dividends.
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