Question

The most recent financial statements for Alexander Co. are shown here: Income Statement Balance Sheet Sales $ 43,100 Current assets $ 17,660 Long-term debt $ 37,120 Costs 35,600 Fixed assets 68,400 Equity 48,940 Taxable income $ 7,500 Total $ 86,060 Total $ 86,060 Taxes (22%) 1,650 Net income $ 5,850 Assets and costs are proportional to sales. The company maintains a constant 40 percent dividend payout ratio and a constant debt-equity ratio. What is the maximum dollar increase in sales that can be sustained assuming no new equity is issued? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

$3,328.61

Step-by-step explanation:

In this question to find out the maximum dollar increase in sales without issuing new equity , we need to take help of sustainable growth rate, whose formula =

(Return on equity x Retention ratio) / [1 - (Return on equity x Retention ratio)]

Here we need to take out the sustainable growth rate and multiply it by total sales .

So lets take out the sustainable growth rate by first calculating its components -

Return on equity = Net income / Total equity

= $5,850 / 48,940

= .1195

Retention ratio = 1 - Dividend payout ratio

= 1 - 40%

= 1 - .4

= .6

Now calculating substantial growth rate =

(Return on equity x Retention ratio) / [1 - (Return on equity x Retention ratio)]

= (.1195 x .6) / [1 - (.1195 x .6)]

= .0717 / [1 - .0717]

= .0717 / .9283

= .07723 ( multiplying by 100 to make in percentage)

= 7.723%

Now multiplying this by total sales,

MAXIMUM INCREASE IN SALES = $43,100 X 7.723%

= $ 3,328.61