Question

What is the maximum increase in sales that can be sustained assuming no new equity is issued

Answer 1

Answer:

Example 1 is 25%

Example 2 is 3.5%

Example 3 could be $10,464.41  See attached.

Step-by-step explanation:

Example 1

An increase of sales to $9,500 is an increase of:

Sales increase = ($9,500 - 7,600) / $7,600

Sales increase = .25, or 25%

Assuming costs and assets increase proportionally, the pro forma financial statements will look like this:

Pro forma income statement Pro forma balance sheet

Sales $ 9,500.00 Assets $ 23,875.00 Debt $ 7,000.00

Example 2.

Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity. Because shareholders' equity is equal to a company’s assets minus its debt, ROE is considered the return on net assets. ROE is considered a gauge of a corporation's profitability and how efficient it is in generating profits.

Example below given on 2nd example is 60% payout ratio type question with constant debt equity ratio.

Return on equity 34008 / 90400 = 0.37619469

A / S = $ 34,008 / $ 90,400 = 37.6%

L / S = $ 9,040 / $ 90,400 = 10%

Change in Sales or ΔSales = $ a - $ 90.400 = $ b

EFN = (.376 x $ b) - (.10 x $ b ) - ((profit margin x $ a) x (1 - .dividend payout ratio))

Formula EFn = 0 = full subtraction of EFN

Example 3 - Calculation of the EFN:

Total Assets last year = $ 6.5 Million

Total Sales last year = $ 21.0 Million

Total Current Liabilities last year = $ 2.1 Million

Profit Margin = 4% of sales

Forecasted Sales = $ 24.5 Million

Dividend Payout Ratio or d = 60%

A / S = $ 6.5 / $ 21.0 = 31%

L / S = $ 2.1 / $ 21.0 = 10%

Change in Sales or ΔSales = $ 24.5 - $ 21.0 = $ 3.5

EFN = (.31 x $ 3.5) - (.10 x $ 3.5) - ((.04 x $ 24.5) x (1 - .60))

EFN = $ 1.085 - $ .35 - ($ .98 x .40)

EFN = $ .735 - $ .392

EFN = $ .343