Question

Martin Aerospace is currently operating at full capacity based on its current level of assets. Sales are expected to increase by 4.5 percent next year, which is the firm's internal rate of growth. Net working capital and operating costs are expected to increase directly with sales. The interest expense will remain constant at its current level. The tax rate and the dividend payout ratio will be held constant. Current and projected net income is positive. Which one of the following statements is correct regarding the pro forma statement for next year?
a. Total assets will increase at the same rate as sales.
b. Long-term debt will increase in direct relation to sales.
c. Owners' equity will remain constant.
d. The pro forma profit margin is equal to the current profit margin.
e. Retained earnings will increase at the same rate as sales.

Answer 1

Answer:

option A is correct

Explanation:

Answer:

Option 1 i.e. Total assets will increase at the same rate as sales.

As, currently the Martin Aerospace is Operating at full capacity, which means it has the sufficient resources to meet the current level of activities.

If the Sales are expected to increase, the operating activities will also needs to be increased to meet the expected level of sales and to meet the requirement. At the same point, assets need to be increased in same proportion as to expectation of sales.