Cash                                                   $ 100.00          ´   2                   =       $ 200.00

Accounts receivable                  200.00          ´   2                   =           400.00

Inventories                                200.00          ´   2                   =           400.00

Net fixed assets                         500.00          + 0.0                 =          500.00

Total assets                           $1,000.00                                               $1,500.00

Accounts payable                   $   50.00          ´   2                   =     $   100.00

Notes payable                            150.00          150.00 + 360.00 =           510.00

Accruals                                      50.00          ´   2   =              1             00.00

Long-term debt                          400.00                                                    400.00

Common stock                          100.00                                                    100.00

Retained earnings                      250.00          + 40                 =          290.00

Total liabilities

and equity                            $1,000.00                                              $1,140.00

    AFN                                                                                                  $ 360.00

Capacity sales = Sales/0.5 = $1,000/0.5 = $2,000.

Target FA/S ratio = $500/$2,000 = 0.25.

Target FA = 0.25($2,000) = $500 = Required FA.

Since the firm currently has $500 of fixed assets, no new fixed assets will be required.

Addition to RE = M(S₁)(1 - Payout ratio) = 0.03($2,000)(1 - 0.55) = $27