INCOME STATEMENT Sales $50,000 Costs 38,000 Taxable Income $12,000 Taxes (34%) 4
ID: 2646513 • Letter: I
Question
INCOME STATEMENT
Sales $50,000
Costs 38,000
Taxable Income $12,000
Taxes (34%) 4,080
Net Income $7,920
BALANCE SHEET
Current Assets $24,000
Fixed Assets $91,000
Total $115,000
Long-term Debt $54,500
Equity $60,500
Total $115,000
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 increase in sales that can be sustained assuming no new equity is issued? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).)
Assets and costs are proportional to sales. The company maintains a constant 40 percent dividend payout ratio and a constant debt-equity ratio.
Explanation / Answer
Current retained Earning = Net income - Dividend
Current retained Earning = 7920 - 40%*7920
Current retained Earning = 4752
Let % increase in sales be x
Addition to Retained earning Next Year = (1+ % increase in sales) *Current retained Earning
Addition to Retained earning Next Year = (1+x)*4752
Increase in Asset = % increase in sales*Current Year Total Asset
Increase in Asset = x*115000
Current debt to Equity Ratio = 54500/60500 = 109/121
Increase in Asset comprises equity portion = Increase in Asset *(121/(109+121))
Increase in Asset comprises equity portion = 115000x *121/230
Increase in Asset comprises equity portion = 60500x
Assuming no new equity is issued
Increase in Asset comprises equity portion = Addition to Retained earning Next Year
60500x = (1+x)*4752
60500x = 4752 + 4752x
60500x - 4752x = 4752
x = 4752/55748
x = 8.524073%
Maximum increase in sales = Current sale * % increase in sales
Maximum increase in sales = 50000*8.524073%
Maximum increase in sales = $ 4262.04
Note : Total Sale in next year should be = 50000 + 4262.04 = $ 54,262.04