In this case, debt is the plug variable used to balance out projected total assets and liabilities.

This example shows the interaction between sales growth and financial policy. As sales increase, so do total assets. This occurs because the firm must invest in net working capital and fixed assets to support higher sales levels. Because assets are growing, total liabilities and equity, the right-hand side of the balance sheet, will grow as well.

The thing to notice from our simple example is that the way the liabilities and owners' equity change depends on the firm's financing policy and its dividend policy. The growth in assets requires that the firm decide on how to finance that growth. This is strictly a managerial decision. Note that, in our example, the firm needed no outside funds. This won't usually be the case, so we explore a more detailed situation in the next section.

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