Question

The most recent financial statements for Alexander Co. are shown here: Income Statement Balance Sheet Sales $ 42,800 Current assets $ 17,500 Long-term debt $ 37,000 Costs 35,500 Fixed assets 68,300 Equity 48,800 Taxable income $ 7,300 Total $ 85,800 Total $ 85,800 Taxes (23%) 1,679 Net income $ 5,621 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

Answer:

Explanation:

The maximum  dollar increase in sales that can be sustained assuming no new equity is issued can be calculated as follows;

Step 1 : Return on Equity = Net Income/ Total Equity x 100

= $ ( 5,621/ 48,800) x 100

= 11.52% (approx)

Step 2- Dividend Payaout Ratio = 40%

Hence, retention ratio = 100% - 40%

= 60%

Step 3- Sustainable Growth rate equation = [(Return on Equity x retention Ratio)/([1- (Return on Equity x retention ratio)]

= [(0.1152 x 0.6)/[1 - (0.1152 x 0.6)]

= [( 0.0691)/[1-(0.0691)]

= 0.0742 = 7.42% (approx)

Hence, Maximum dollar increase in sales = ($42,800) x 7.42%

= $3177.01 (approx)