Question

The most recent financial statements for Alexander Co. are shown here: Income Statement Balance Sheet Sales $ 45,650 Current assets $ 19,020 Long-term debt $ 37,970 Costs 36,450 Fixed assets 69,250 Equity 50,300 Taxable income $ 9,200 Total $ 88,270 Total $ 88,270 Taxes (24%) 2,208 Net income $ 6,992 Assets and costs are proportional to sales. The company maintains a constant 35 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

Answer 1

$4,533.05

Step-by-step explanation:

Return on equity (ROE) = Net income / Equity

Return on equity (ROE) = $6,992 / $50,300

Return on equity (ROE) = 13.9%

Retention ratio = 1 - Dividend payout ratio

Retention ratio = 1 - 35%

Retention ratio = 65%

Sustainable growth rate = [13.9%*65%] / [1 - 13.9%*65%]

Sustainable growth rate = 0.09035 / 0.90965

Sustainable growth rate =0.09932392

Sustainable growth rate = 9.93%

Maximum dollar increase = Sales * Sustainable growth rate

Maximum dollar increase = $45,650 * 9.93%

Maximum dollar increase = $4,533.05