The most recent financial statements for Alexander Co. are shown here: Income St
ID: 2620765 • Letter: T
Question
The most recent financial statements for Alexander Co. are shown here: Income Statement Balance Sheet Sales $ 49,600 Current assets $ 22,800 Long-term debt $ 46,000 Costs 37,800 Fixed assets 89,000 Equity 65,800 Taxable income $ 11,800 Total $ 111,800 Total $ 111,800 Taxes (34%) 4,012 Net income $ 7,788 Assets and costs are proportional to sales. The company maintains a constant 20 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.) Maximum increase in sales $
Explanation / Answer
Return on Equity (ROE) = (Net Income / Equity) x 100 = ($7,788 / $65,800) x 100 = 11.835866261% or 0.11835866261
Retention Ratio (b) = 1 - Dividend payout ratio = 1 - 20% = 0.80
Sustainable growth rate (SGR) = (ROE x b) / [ 1 - (ROE x b) ]
or, SGR = (0.11835866261 x 0.80) / [ 1 - (0.11835866261 x 0.80) ] = 0.10459026079 or 10.459026079%
Maximum increase in Sales = Current sales x SGR = $49,600 x 10.459026079% = $5,187.67693518 or $5,187.68