The Libris Publishing Company had revenues of $200 million this year and expects a 50% growth to $300 million next year. Costs and expenses other than interest are forecast at $250 million. The firm currently has assets of $280 million and current liabilities of $40 million. Its debt to equity ratio is 3:1. (That is, capi- tal is 75% debt and 25% equity.) It pays 12% interest on all of its debt, and is sub- ject to federal and state income taxes at a total effective rate of 39%.
Libris expects assets and current liabilities to grow at 40%, 10% less than the revenue growth rate. The company plans to pay dividends of $10 million next year.
a. What is the planned debt to equity ratio at the end of next year?
b. Do these results indicate a problem?